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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2007

or

| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from              to

Commission File Number: 1-12785



LOGO

NATIONWIDE FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 31-1486870                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)

|                                         |  |           
|---------------------------------------- |  | ----------
|One Nationwide Plaza, Columbus, Ohio     |  | 43215     
|(Address of principal executive offices) |  | (Zip Code)

(614) 249-7111

(Registrants telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:

|                                                 |  |                                            
|------------------------------------------------ |  | -------------------------------------------
|Class A Common Stock (par value $0.01 per share) |  | New York Stock Exchange                    
|(Title of Class)                                 |  | (Name of each exchange on which registered)

Securities registered pursuant to Section 12 (g) of the Act:

None



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes  x    No   ̈

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes   ̈    Nox

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by
check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
(Check one):

Large accelerated filer  x    Accelerated
filer   ̈    Non-accelerated filer   ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes   ̈    No  x

Aggregate market value of the registrants voting common equity held by non-affiliates on June 30, 2007 computed by reference to the closing sale price per share of the registrants Class A common stock on the New York
Stock Exchange as of June 30, 2007 was $3.23 billion.

As of February 26, 2008, the registrant had 46,154,188
shares outstanding of its Class A common stock (par value $0.01 per share) and 91,778,717 shares outstanding of its Class B common stock (par value $0.01 per share).

Documents Incorporated by Reference

Part III of this Form 10-K incorporates by
reference certain information from the registrants definitive Proxy Statement for the 2008 Annual Meeting of Shareholders.







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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2007

TABLE OF CONTENTS



|                                                           |  |                                                                                                  |  |   
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------ |  | --
|PART I                                                     |  | 1                                                                                               
|ITEM 1                                                     |  | BUSINESS                                                                                         |  | 1 
|ITEM 1A                                                    |  | RISK FACTORS                                                                                     |  | 17
|ITEM 1B                                                    |  | UNRESOLVED STAFF COMMENTS                                                                        |  | 20
|ITEM 2                                                     |  | PROPERTIES                                                                                       |  | 20
|ITEM 3                                                     |  | LEGAL PROCEEDINGS                                                                                |  | 20
|ITEM 4                                                     |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                              |  | 20
|PART II                                                    |  | 21                                                                                              
|ITEM 5                                                     |  | MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS COMMON EQUITY
 AND RELATED STOCKHOLDER MATTERS |  | 21
|ITEM 6                                                     |  | SELECTED CONSOLIDATED FINANCIAL DATA                                                             |  | 24
|ITEM 7                                                     |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS            |  | 25
|ITEM 7A                                                    |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                       |  | 77
|ITEM 8                                                     |  | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                         |  | 85
|ITEM 9                                                     |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE             |  | 85
|ITEM 9A                                                    |  | CONTROLS AND PROCEDURES                                                                          |  | 85
|ITEM 9B                                                    |  | OTHER INFORMATION                                                                                |  | 86
|PART III                                                   |  | 87                                                                                              
|ITEM 10                                                    |  | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                           |  | 87
|ITEM 11                                                    |  | EXECUTIVE COMPENSATION                                                                           |  | 91
|ITEM 12                                                    |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS   |  | 91
|ITEM 13                                                    |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE                        |  | 91
|ITEM 14                                                    |  | PRINCIPAL ACCOUNTING FEES AND SERVICES                                                           |  | 91
|PART IV                                                    |  | 92                                                                                              
|                                                           |  |                                                                                                 
|ITEM 15                                                    |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES                                                          |  | 92
|CONSOLIDATED FINANCIAL STATEMENTS                          |  |                                                                                                 
|REPORT OF MANAGEMENT                                       |  | F-1                                                                                             
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    |  | F-2                                                                                             
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    |  | F-3                                                                                             
|CONSOLIDATED STATEMENTS OF INCOME                          |  | F-4                                                                                             
|CONSOLIDATED BALANCE SHEETS                                |  | F-5                                                                                             
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY |  | F-6                                                                                             
|CONSOLIDATED STATEMENTS OF CASH FLOWS                      |  | F-7                                                                                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 |  | F-8                                                                                             
|SIGNATURES                                                 |  | F-82                                                                                            



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PART I



ITEM 1    BUSINESS



Overview



Nationwide Financial
Services, Inc. (NFS, or collectively with its subsidiaries, the Company) was formed in November 1996. NFS is the holding company for Nationwide Life Insurance Company (NLIC) and other companies that comprise the domestic life insurance and
retirement savings operations of the Nationwide group of companies (Nationwide). This group includes Nationwide Financial Network (NFN), which refers to Nationwide Life Insurance Company of America (NLICA) and subsidiaries, including the affiliated
distribution network. NFS is incorporated in Delaware and maintains its principal executive offices in Columbus, Ohio.



The Company is a leading provider of long-term savings and retirement products in the United States of America (U.S.). The Company
develops and sells a diverse range of products including individual annuities, private and public sector group retirement plans, other investment products sold to institutions, life insurance and investment advisory services. The Company also
provides a wide range of banking products and services through Nationwide Bank (see Part II, Item 7Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)OverviewNationwide Bank
Mergerfor more information) and mutual funds through Nationwide Funds Group (NFG) (see Part II, Item 7MD&AOverviewNationwide Funds Group Acquisitionfor more information).



The Company sells its products through a diverse distribution
network. Unaffiliated entities that sell the Companys products to their own customer bases include independent broker/dealers, financial institutions, wirehouse and regional firms, pension plan administrators, and life insurance specialists.
Representatives of the Company that market products directly to a customer base include Nationwide Retirement Solutions, Inc. (NRS), an indirect wholly-owned subsidiary; NFN producers; Mullin TBG Insurance Agency Services, LLC (Mullin TBG), a joint
venture between the Companys majority-owned subsidiary, TBG Insurance Services Corporation d/b/a TBG Financial (TBG Financial), and MC Insurance Agency Services, LLC d/b/a Mullin Consulting (Mullin Consulting) (see Part II,
Item 7MD&AOverviewDiscontinued Operationsfor information related to the Companys intention to sell its interest in this business); and NFG. The Company also distributes retirement savings products through the
agency distribution force of its ultimate majority parent company, Nationwide Mutual Insurance Company (NMIC). The Company believes its broad range of competitive products, strong distributor relationships and diverse distribution network position
it to compete effectively in the rapidly growing retirement savings market.



The Company has grown its customer base in recent years as a result of its long-term investments in developing the distribution channels necessary to reach its target customers and the products required to meet the
demands of these customers. The Company believes its growth has been enhanced further by favorable demographic trends and the growing tendency of Americans to supplement traditional sources of retirement income with self-directed investments, such
as products offered by the Company. From 1997 to 2007, the Companys customer funds managed and administered grew from $57.46 billion to $162.4 billion, a compound annual growth rate of 9.91%. Asset growth during this period resulted from net
flows into the Companys products, interest credited to and market appreciation of policyholder accounts, and acquisitions.



Capital Stock Transactions



The 46.7 million shares of Class A common stock outstanding as of December 31, 2007 are publicly held and primarily were
issued through NFS initial public offering completed in March 1997 and in conjunction with the acquisition of NFN in October 2002. The Class A shares represent 33.7% of the equity ownership in NFS and 4.8% of the combined voting power of
NFS Class A and Class B common stock as of December 31, 2007. Nationwide Corporation (Nationwide Corp.), a majority-owned subsidiary of NMIC, owns all of the outstanding shares of Class B common stock, which represents the remaining
66.3% equity ownership and 95.2% of the combined voting power of the shareholders of NFS as of December 31, 2007.



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Business Segments



Individual Investments



The Individual Investments segment consists of individual The BEST of AMERICA® and private label deferred variable annuity products, individual annuity products, deferred fixed annuity products, income products and investment advisory services. Individual deferred annuity
contracts provide the customer with tax-deferred accumulation of savings and flexible payout options including lump sum, systematic withdrawal or a stream of payments for life. In addition, individual variable annuity contracts provide the customer
with access to a wide range of investment options and asset protection features, while individual fixed annuity contracts generate a return for the customer at a specified interest rate fixed for prescribed periods.



The following table summarizes selected financial data for
the Companys Individual Investments segment for the years ended December 31:



|                              |  |      |          |      |   |          |  |   |         
|----------------------------- |  | ---- | -------- | ---- | - | -------- |  | - | --------
|(in millions)                 |  | 2007 |          | 2006 |   | 2005    
|Total revenues                |  | $    | 1,469.8  |      | $ | 1,526.6  |  | $ | 1,528.2 
|Pre-tax operating earnings    |  |      | 300.7    |      |   | 223.1    |  |   | 250.7   
|Account values as of year end |  |      | 53,587.0 |      |   | 52,963.6 |  |   | 51,227.6



The
Company believes that demographic trends and shifts in attitudes toward retirement savings will continue to support increased consumer demand for its individual investment products. The Company also believes that it possesses distinct competitive
advantages in the market for variable annuities. Some of the Companys most important advantages include its innovative product offerings and strong relationships with independent well-known fund managers. The Companys principal annuity
product series, The BEST of AMERICA, allows customers to choose from over 50 investment options, which include funds managed by many of the premier U.S. mutual fund managers. The Company also sells individual fixed annuities, primarily
through the financial institutions channel.



The Company markets its Individual Investments products through a broad spectrum of distribution channels, including independent broker/dealers, financial institutions, wirehouse and regional firms, pension plan administrators, NRS, NFN
producers and Nationwide agents. The Company attempts to increase its market share of sales through these channels by working closely with its investment managers and product distributors to adapt the Companys products and services to changes
in the retail and institutional marketplace.



The variable annuity market is attractive to the Company because of its demographic positioning and unique value proposition. The retirement income and other financial protection that characterize the current variable annuity market are
valuable tools for individuals approaching or already in retirement. Tremendous opportunity exists for variable annuity providers that can reach this growing market as the baby boomer population approaches peak retirement ages. In addition, variable
annuities generally have more favorable capital usage and risk-adjusted return prospects than fixed annuities. The Company has de-emphasized the sale of fixed annuities because of lower risk-adjusted return prospects and the difficulty in attracting
and retaining customers in such a highly commoditized market.



The Company receives income from variable annuity contracts primarily in the form of asset fees. Most of the Companys variable annuity products include a contingent deferred sales charge, also known as a
surrender charge or back-end load. This charge is assessed against premium withdrawals in excess of specified amounts in the early years of the contract (usually the first seven years). Surrender charges are intended to
protect the Company from withdrawals before the Company has had the opportunity to recover its initial sales expenses. Generally, surrender charges on individual variable annuity products equal 7% of deposits withdrawn during the first year, scaling
ratably to no charge for the eighth year and beyond. Surrender charge periods of zero and four years are also available for some of the Companys products.



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The Companys variable annuity products consist almost entirely of flexible premium
deferred variable annuity (FPVA) contracts. Such contracts are savings vehicles in which the customer makes a single deposit or series of deposits. The customer has the flexibility to invest in mutual funds managed by independent investment managers
and NFG. In addition to mutual fund elections, fixed investment options are available to customers who purchase certain of the Companys variable annuities by designation of some or all of their deposits to such options. A fixed option offers
the customer a guarantee of principal and a guaranteed interest rate for a specified time period. Deposit intervals and amounts are flexible and, therefore, subject to variability. The value of a variable annuity fluctuates in accordance with the
investment experience of the underlying mutual funds chosen by the customer. Such contracts have no maturity date and remain in force until the customer elects to take the proceeds of the annuity as a single payment or as a specified income stream
for life or for a fixed number of years. The customer is permitted to withdraw all or part of the accumulated value of the annuity, less any applicable surrender charges, at any time. As specified in the FPVA contract, the customer generally can
choose from a number of payment options that provide either a fixed or variable stream of benefit payments.



Guarantees are a common feature throughout the variable annuity industry. In addition to tax deferral, death benefit and living benefit
guarantees differentiate variable annuities from other securities available in the financial services marketplace. Nearly all of the Companys individual variable annuity products include guaranteed minimum death benefit (GMDB) features. A GMDB
generally provides additional benefits if the annuitant dies and the policyholders contract value is less than a defined amount, which may be based on the premiums paid less amounts withdrawn or a policyholder contract value on a specified
anniversary date. While GMDBs do create additional risk to the Company, such benefits are generally less valuable and less sensitive to assumption risk than living benefits. Accordingly, the Company is careful to offer only living benefit features
that meet an acceptable risk/return profile. Beginning in 1999, the Company began offering optional guaranteed minimum income benefits (GMIBs), a living benefit that provides for enhanced annuitization guarantees. During 2003, the Company replaced
its GMIB offering with Capital Preservation Plus, a guaranteed minimum accumulation benefit (GMAB) that provides a minimum investment return over 5 to 10 year horizons regardless of actual account performance. In 2005, the Company further modified
its GMAB offering by developing a hybrid GMAB/guaranteed lifetime withdrawal benefit (GLWB) called Capital Preservation Plus Lifetime Income (CPPLI). This feature provides an enhanced retirement income floor option following the maturity of the GMAB
guarantee. In 2006, the Company added a stand-alone GLWB, Lifetime Income (L.inc), to complement CPPLI in its product offerings. L.inc provides for enhanced retirement income security via guaranteed accumulation rates and withdrawal rates that
increase with age without the liquidity loss associated with annuitization. The Company continually refines these features to keep them attractive to prospective buyers while also balancing the risk and costs borne by the Company. See Note 10 to the
audited consolidated financial statements included in the F pages of this report for further discussion of variable annuity contracts offered by the Company.



Fixed annuity products are marketed to individuals who seek long-term savings products that provide a guarantee of principal, a stable net
asset value and a guarantee of the interest rate to be credited to the principal amount for a specified time period. Fixed annuities generally consist of single premium deferred annuity (SPDA) and flexible premium deferred annuity (FPDA) contracts
with initial interest guarantees of one to five years and annual re-determination of crediting rates thereafter. Both SPDAs and FPDAs are subject to long-term minimum crediting rates generally ranging from 1.5% to 3.5%. The Company invests fixed
annuity customer deposits at its discretion in its general account investment portfolio, while variable annuity customer deposits are invested in mutual funds as directed by the customer and are held in the Companys separate account. Unlike
variable annuity assets that are held in the Companys separate account, the Company bears the investment risk on assets held in its general account. The Company attempts to earn a spread by investing a customers deposits for higher
yields than the interest rate it credits and associated expenses. Most fixed annuity contracts provide for the imposition of surrender charges, which are assessed against withdrawals (in excess of specified amounts) and serve to reimburse the
company for unrecovered acquisition costs in the event of early termination. Generally, surrender charges on individual fixed annuity products are 6% to 8% of deposits withdrawn during the first year and typically decline annually, disappearing
after five to seven contract years. Surrender charges are often limited to interest earned since inception. SPDA and FPDA contracts have no maturity date and remain in force



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until the customer elects to take the proceeds of the annuity as a single payment or as a specified income stream for life or for a fixed number of years.
The Companys individual fixed annuity products primarily are distributed through unaffiliated financial institutions and affiliated channels.



In 2005, the Company began issuing a fixed equity-indexed annuity (EIA) known as Clear Horizon. Unlike traditional individual fixed
annuities, EIAs provide for interest earnings that are linked to the performance of specified equity market indices. Clear Horizon is a single premium, annual reset EIA under which an index credit is made (if applicable) on the last day of the
calendar quarter of each policy anniversary, known as the index maturity date. The index credit is based on changes in the Standard & Poors (S&P) 500 Index and is subject to an index cap that varies based on when a contract is
issued. Index credits are guaranteed never to be less than 0%.



Income products include single premium immediate annuity (SPIA) contracts. SPIAs are annuities that require a one-time deposit in exchange for guaranteed periodic annuity benefit payments, either for a certain time
period or for the contractholders lifetime.



During 2007, the average net investment income earned and interest credited rates on contracts (including the fixed option under the Companys variable contracts) in the Individual Investments segment were 5.69% and 3.76%, respectively
(5.74% and 3.76%, respectively, in 2006).



The
Company offers individual variable annuities under The BEST of AMERICA brand name. The Company also markets individual variable annuities as private label products.



Individual The BEST of AMERICA Products. The Companys principal individual FPVA contracts are
sold under the brand name The BEST of AMERICA, and the Company also offers FPVA contracts under different names. The BEST of AMERICA brand name individual variable annuities accounted for $5.17 billion (84%) of the Companys Individual
Investments segment sales in 2007 ($4.39 billion, or 81%, in 2006, and $3.14 billion, or 76%, in 2005) and $38.37 billion (72%) of the Companys Individual Investments segment account values as of December 31, 2007 ($36.11 billion, or
68%, as of December 31, 2006). Certain of The BEST of AMERICA products are designed to allow for greater specialization of product design by distribution channel, liquidity options with shorter surrender charges, and enhanced death benefit and
living benefit guarantees. Americas MarketFLEX Annuity is a specialty variable annuity offering tactical asset allocation services. All of these products generate asset fees and also may generate administration fees for the Company.



Private Label Individual Variable
Annuities.These products accounted for $434.6 million (7%) of the Companys Individual Investments segment sales in 2007 ($356.6 million, or 7%, in 2006, and $346.6 million, or 8%, in 2005) and $7.44 billion (14%) of the
Companys Individual Investments segment account values as of December 31, 2007 ($7.32 billion, or 14%, as of December 31, 2006). The Company has developed several private label variable annuity products in conjunction with other
financial intermediaries. These products allow financial intermediaries to market products with substantially the same features as the Companys brand name products to their own customer bases under their own brand names. The Company believes
these private label products strengthen the Companys ties to certain significant distributors of the Companys products. These products generate asset fees and also may generate administrative fees for the Company.



Individual Deferred Fixed Annuity Contracts.Deferred
fixed annuities consist of SPDA and FPDA contracts. Total deferred fixed annuities accounted for $156.3 million (3%) of the Companys Individual Investments segment sales in 2007 ($186.5 million, or 3%, in 2006, and $194.4 million, or 5%,
in 2005) and $4.72 billion (9%) of the Companys Individual Investments segment account values as of December 31, 2007 ($6.54 billion, or 12%, as of December 31, 2006). SPDA and FPDA contracts are distributed primarily through
financial institutions and Nationwide agents.



Individual Single Premium Immediate Annuity Contracts.The Company offers both fixed and variable SPIA contracts. SPIA contracts accounted for $216.7 million (4%) of the Companys Individual Investments segment sales in
2007 ($230.7 million, or 4%, in 2006, and $196.7 million, or 5%, in 2005) and $2.10 billion (4%) of the



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Companys Individual Investments account segment values as of December 31, 2007 ($2.03 billion, or 4%, as of December 31, 2006). SPIAs are
annuities that require a one-time deposit in exchange for guaranteed, periodic annuity benefit payments, often for the contractholders lifetime. SPIA contracts are attractive to customers at or near retirement age seeking a steady stream of
future income. The Companys SPIA contracts are offered through both affiliated and unaffiliated distribution channels and may be purchased directly or through annuitization of any of the Companys various individual and group deferred
annuity contracts.



Retirement Plans



The Retirement Plans segment is comprised of the
Companys private and public sector retirement plans business. The private sector primarily includes Internal Revenue Code (IRC) Section 401 fixed and variable group annuity business generated through NLIC and trust and custodial services
through Nationwide Trust Company, FSB, a division of Nationwide Bank (NTC). Also included in the private sector is Registered Investment Advisors Services, Inc. d/b/a RIA Services Inc. (RIA), which facilitates professional money management of
participant assets by registered investment advisors. The public sector primarily includes IRC Section 457 and Section 401(a) business in the form of full-service arrangements that provide plan administration and fixed and variable group
annuities as well as administration-only business.



The following table summarizes selected financial data for the Companys Retirement Plans segment for the years ended December 31:



|                              |  |      |          |      |   |          |  |   |         
|----------------------------- |  | ---- | -------- | ---- | - | -------- |  | - | --------
|(in millions)                 |  | 2007 |          | 2006 |   | 2005    
|Total revenues                |  | $    | 1,146.2  |      | $ | 1,115.6  |  | $ | 1,045.2 
|Pre-tax operating earnings    |  |      | 252.6    |      |   | 221.2    |  |   | 191.3   
|Account values as of year end |  |      | 80,546.6 |      |   | 76,597.1 |  |   | 69,850.8



Most
private sector plans are sold through the Companys trust product offerings. The Company also sells group annuity products, the majority of which are fixed annuities offered as an investment option along with the trust product offering. The mix
of product sales is consistent with the Companys significant investment in NTC to develop trust product capabilities not prevalent elsewhere in the market.



The Companys variable group annuity and trust products provide individual participants the ability to
invest in mutual funds managed by independent investment managers and NFG. Deposit intervals and amounts are flexible and, therefore, subject to variability. The value of a variable group annuity varies with the investment experience of the mutual
funds chosen by participants. Participants are restricted in their ability to withdraw funds from these contracts without tax penalties. The Company receives income from variable group annuity and trust contracts primarily in the form of asset and
administrative fees. In addition, many of the Companys variable group annuity and trust products provide for a surrender charge that is assessed against withdrawals in excess of specified amounts made during a period generally not exceeding
nine years from contract issuance. Surrender charges are intended to protect the Company from withdrawals early in the contract period, before the Company has had the opportunity to recover its sales expenses.



The Companys fixed group annuity contracts provide
individual participants a guarantee of principal and a guaranteed interest rate for a specified time period. The Company attempts to earn a spread by investing a participants deposits for higher yields than the interest rate credited to the
participants contract.



During 2007, the
average net investment income earned and interest credited rates on fixed contracts in the Retirement Plans segment were 5.88% and 3.98%, respectively (5.88% and 4.07%, respectively, during 2006).



The Company markets employer-sponsored group annuities to
both public sector employees for use in connection with plans described under IRC Section 457, Section 403(b) and Section 401(a) and to private sector employees for use in connection with IRC Section 401 and 403(b) plans. In
addition, trust products offered



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through NTC are marketed in the private sector. These private sector employer-sponsored group annuities and trust products are marketed under several brand
names, including The BEST of AMERICA Group Pension Series.



The BEST of AMERICA Group Pension Series.These products are offered as group annuity contracts and trust products by NTC. The BEST of AMERICA group annuity products accounted for $1.06 billion (10%) of
the Companys Retirement Plans segment sales in 2007 ($1.23 billion, or 12%, in 2006, and $1.37 billion, or 14%, in 2005) and $7.18 billion (9%) of the Companys Retirement Plans account values as of December 31, 2007 ($7.56
billion, or 10%, as of December 31, 2006). Trust products accounted for $5.13 billion (48%) of segment sales in 2007 ($4.50 billion, or 45%, in 2006, and $3.97 billion, or 42%, in 2005) and $21.81 billion (27%) of segment account
values as of December 31, 2007 ($18.83 billion, or 25%, as of December 31, 2006). The BEST of AMERICA group products are typically offered only on a tax-qualified basis. These products may be structured with a variety of features that may
be arranged in over 600 combinations of front-end loads, back-end loads and asset-based fees.



Section 457 Group Annuity Contracts.These group annuity contracts accounted for $1.55 billion (14%) of the Companys Retirement Plans segment sales in 2007 ($1.53 billion,
or 15%, in 2006, and $1.54 billion, or 16%, in 2005) and $17.10 billion (21%) of the Companys Retirement Plans segment account values as of December 31, 2007 ($15.98 billion, or 21%, as of December 31, 2006). The Company offers
a variety of group variable annuity contracts that are designed primarily for use in conjunction with plans described under IRC Section 457, which permits employees of state and local governments to defer a certain portion of their annual
income and invest such income on a tax-deferred basis. These contracts typically generate asset fees and also may generate annual administrative fees for the Company.



Administration-Only Contracts. The Company offers administration and record-keeping services to IRC
Section 457 plans outside of a group annuity contract. The contracts for these services accounted for $2.72 billion (25%) of the Companys Retirement Plans segment sales in 2007 ($2.48 billion, or 25%, in 2006, and $2.34 billion, or
25%, in 2005) and $31.16 billion (39%) of the Companys Retirement Plans segment account values as of December 31, 2007 ($27.97 billion, or 37%, as of December 31, 2006). In the past few years, the Company has experienced a shift
in product mix from group annuity contracts to more administration-only cases. The Company collects a fee for administration-only contracts either as a percentage of plan assets or as a specified amount per participant or per contract.



NFN Group Annuities.NFN sells Selector+ Group
Variable Annuities, which accounted for $149.4 million (1%) of the Companys Retirement Plans segment sales in 2007 ($188.2 million, or 2%, in 2006, and $205.9 million, or 2%, in 2005) and provide diversified separate account investment
options. The All Pro series of separate accounts is a series of multi-managed, style-specific separate accounts developed in conjunction with Wilshire Associates, Inc. The All Pro series is used in the STAR Program to develop asset allocation
models. The STAR Program was developed to address the needs of plan sponsors making investment decisions to meet the stated objectives of their plan. The Selector+ Group Variable Annuity is available for governmental and corporate qualified
retirement plans and has the flexibility to enable producers to choose from asset-based fees, deposit-based fees or a combination of both.



Individual Protection



The Individual Protection segment consists of investment life insurance products, including individual variable, corporate-owned life
insurance (COLI) and bank-owned life insurance (BOLI) products; traditional life insurance products; and universal life insurance products. Life insurance products provide a death benefit and generally allow the customer to build cash value on a
tax-advantaged basis.



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The following table summarizes selected financial data for the Companys Individual
Protection segment for the years ended December 31:



|                                              |  |      |           |      |   |           |  |   |          
|--------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|(in millions)                                 |  | 2007 |           | 2006 |   | 2005     
|Total revenues                                |  | $    | 1,349.7   |      | $ | 1,321.0   |  | $ | 1,321.1  
|Pre-tax operating earnings                    |  |      | 299.8     |      |   | 280.8     |  |   | 266.1    
|Life insurance policy reserves as of year end |  |      | 20,990.5  |      |   | 19,686.8  |  |   | 17,388.6 
|Life insurance in force as of year end        |  |      | 137,518.7 |      |   | 133,312.7 |  |   | 126,361.1



The
Company seeks to become a leading provider of life insurance and protection solutions to small businesses and consumers, helping individuals achieve financial security as they prepare for and live in retirement. By continuing to invest in the
expansion of its universal and variable universal life insurance products, the Company seeks to capture a growing share of new sales through its various distribution channels.



The Company markets its Individual Protection products through a broad spectrum of distribution channels.
Unaffiliated entities that sell these products to their own customer bases include independent broker/dealers (including brokerage general agencies and producer groups), financial institutions, wirehouse and regional firms, and life insurance
specialists. Representatives of the Company who market these products directly to a customer base include Mullin TBG, NFN producers and Nationwide agents.



COLI and BOLI Products.Corporations purchase COLI and banks purchase BOLI to fund non-qualified benefit plans. Corporations or
banks may make a single premium payment or a series of premium payments. For fixed COLI and BOLI products, premium payments are credited with a guaranteed interest rate that is fixed for a specified time period. For variable COLI and BOLI products,
the contractholders account value is credited with the investment experience of the underlying funds selected by the contractholder. COLI and BOLI products are sold through life insurance specialists, including Mullin TBG.



Traditional Life Insurance Products.Whole life
insurance combines a death benefit with a savings plan that increases gradually over a period of years. The customer generally pays a level premium over the expected lifetime. Whole life insurance contracts allow customers to borrow against their
savings and provide the option of surrendering the policy and receiving the accumulated cash value rather than the death benefit. Term life insurance provides only a death benefit without any savings component. Traditional life insurance products
are sold through NFN producers and Nationwide agents, wirehouse and regional firms, and independent broker/dealers.



Universal Life and Variable Universal Life Insurance Products.The Company offers universal life insurance and variable universal
life insurance products, including both flexible premium and single premium designs. These products provide life insurance under which the benefits payable upon death or surrender depend upon the policyholders account value. Universal life
insurance provides whole life insurance with flexible premiums and adjustable death benefits. For universal life insurance, the policyholders account value is credited an adjustable rate of return set by the Company based on current interest
rates. For variable universal life insurance, the policyholders account value is credited with the investment experience of the mutual funds chosen by the customer. Variable universal life insurance products also typically include a general
account guaranteed interest investment option. For certain products, the Company guarantees that a policy will not lapse if the policyholders account value goes to zero, provided the policyholder has complied with the no lapse guarantee
requirements, including the payment of minimum specified premiums. The Companys variable universal life insurance products are marketed under the Nationwide and The BEST of AMERICA brand names, which have the same wide range of investment
options as the Companys variable annuity products. These products are distributed on an unaffiliated basis by independent broker/dealers, financial institutions, and wirehouse and regional firms, and on an affiliated basis by NFN producers and
Nationwide agents.



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Corporate and Other



The Corporate and Other segment includes the medium-term note (MTN) program; the retail operations of Nationwide Bank;
structured products business; revenues and expenses of the Companys retail asset management business and non-insurance subsidiaries not reported in other segments; and other revenues and expenses not allocated to other segments.



The following table summarizes selected financial data for
the Companys Corporate and Other segment for the years ended December 31:



|                                                      |  |      |        |   |      |   |       |      |  |   |      
|----------------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | -----
|(in millions)                                         |  | 2007 |        |   | 2006 |   |       | 2005
|Operating revenues                                    |  | $    | 716.0  |   |      | $ | 599.9 |      |  | $ | 503.5
|Pre-tax operating earnings                            |  |      | 74.6   |   |      |   | 65.1  |      |  |   | 54.9 
|Non-operating net realized investment (losses) gains1 |  |      | (152.8 | ) |      |   | (0.6  | )    |  |   | 18.2 



|1 | Excluding operating items (periodic net amounts paid or received on interest rate swaps that do not qualify for hedge
accounting treatment, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations).
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



MTN Program. The Companys MTN program represents sales of funding agreements that secure
medium-term notes issued through an unrelated third party trust. This program was launched in 1999 to expand spread-based product offerings. Sales of funding agreements totaled $1.35 billion in 2007 ($1.78 billion in 2006 and $900.0 million in 2005)
and accounted for the majority of the Companys Corporate and Other segment account values as of December 31, 2007 and 2006. Sales under the Companys MTN program are not included in the Companys sales data, as they do not
produce steady production flow that lends itself to meaningful comparisons.



Structured Products.Structured products transactions refer to the structuring, sale and management of investment programs, including commercial mortgage loan securitizations and low-income-housing tax credit
syndications. The Company utilizes such transactions to optimize portfolio management decisions, generate fee income and increase assets under management.



Marketing and Distribution



The Company provides, through both its affiliated and unaffiliated channels, the means for employers sponsoring tax-favored retirement
plans (such as those described in IRC Sections 401 and 457) to allow their employees to make contributions to such plans through payroll deductions. Typically, the Company obtains permission from an employer to market products to employees and
arranges to deduct periodic deposits from employees regular paychecks. The Company believes that the payroll deduction market is characterized by more predictable levels of sales than other markets because these customers are less likely than
customers in other markets to stop making annuity deposits, even in times of market volatility. In addition, the Company believes that payroll deduction access to customers provides significant insulation from competition by providing the customer
with a convenient, planned method of periodic saving. Payroll deduction is the primary method used for collecting premiums and deposits in both the private sector market, where the Companys products are distributed primarily through
unaffiliated entities, and in the public sector market, where the Companys products are distributed primarily by affiliated entities.



See Part II, Item 7MD&A for sales by distribution channel for the years ended December 31, 2007, 2006 and 2005.



Unaffiliated Entities



Independent Broker/Dealers and Wirehouse and Regional
Firms.The Company sells individual annuities, group retirement plans and life insurance through independent broker/dealers (including brokerage general agencies and producer groups in the Individual Protection segment) and wirehouse and
regional firms in each



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state and the District of Columbia. The Company believes that it has developed strong broker/dealer relationships based on its diverse product mix, large
selection of fund options and administrative technology. In addition to such relationships, the Company believes its financial strength and the Nationwide and The BEST of AMERICA brand names are competitive advantages in these distribution channels.
The Company regularly seeks to expand this distribution network.



Financial Institutions.The Company markets individual variable and fixed annuities (under its brand names and on a private label basis), IRC Section 401 plans and life insurance through financial
institutions, consisting primarily of banks and their subsidiaries. The Company believes that it has competitive advantages in this distribution channel, including its expertise in training financial institution personnel to sell annuities and
pension products, its breadth of product offerings, its financial strength, the Nationwide and The BEST of AMERICA brand names, and the ability to offer private label products.



Pension Plan Administrators.The Company markets group retirement plans organized pursuant to IRC
Section 401 and sponsored by employers as part of employee retirement programs through regional pension plan administrators. The Company also has linked pension plan administrators to the financial planning community to sell group pension
products. The Company targets employers with 25 to 2,000 employees because it believes that these plan sponsors tend to require extensive record-keeping services from pension plan administrators and therefore are more likely to become long-term
customers.



Life Insurance Specialists.The Company markets COLI and BOLI through life insurance specialists, which are firms that specialize in the design, implementation and administration of executive benefit plans.



Affiliated Entities



NRS.The Company markets various products and services to the public sector, primarily on a retail basis, through several
subsidiary sales organizations. The Company markets group variable annuities and fixed annuities as well as administration and record-keeping services to state and local governments for use in their IRC Section 457 and Section 401(a)
retirement programs. The Company maintains endorsement arrangements with state and local government entities, including the National Association of Counties (NACo), The United States Conference of Mayors (USCM) and The International Association of
Fire Fighters (IAFF).



NFN Producers.NFN producers specialize in marketing asset accumulation, wealth preservation, life insurance, retirement and investment products to affluent individuals and business markets. NFNs products (primarily variable life insurance and group
annuities), are distributed through career agents, independent agents and a pension sales force. In addition to NFN products, NFN producers also sell other NFS products.



Mullin TBG.Mullin TBG sells NFS and unaffiliated entity COLI and BOLI products to fund non-qualified deferred
compensation programs (see Part II, Item 7MD&AOverviewDiscontinued Operationsfor information related to the Companys intention to sell its interest in this business).



Nationwide Agents.The Company sells traditional,
universal and variable universal life insurance products and individual annuities through the licensed agency distribution force of NMIC. Nationwide agents primarily target the holders of personal automobile and homeowners insurance policies
issued by NMIC and affiliated companies. Nationwide agents exclusively sell Nationwide products and may not offer products that compete with those of the Company.



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Reinsurance



The Company follows the industry practice of reinsuring with other companies a portion of its life insurance and annuity risks in order to
reduce net liability on individual risks, to provide protection against large losses and to obtain greater diversification of risks. During 2007, the Company increased the maximum amount of individual life insurance retained by the Company on any
one life from $5.0 million to $10.0 million. This increase is prospective and did not change the retained amount for policies sold prior to the change. The Company cedes insurance primarily on an automatic basis, whereby risks are ceded to a
reinsurer on specific blocks of business where the underlying risks meet certain predetermined criteria, and on a facultative basis, whereby the reinsurers prior approval is required for each risk reinsured. The Company also cedes insurance on
a case-by-case basis, particularly where the Company may be writing new risks or is unwilling to retain the full costs associated with new lines of business. The Company maintains catastrophic reinsurance coverage to protect against large losses
related to a single event. The ceding of risk does not discharge the original insurer from its primary obligation to the policyholder.



The Company has entered into reinsurance contracts with certain unaffiliated reinsurers to cede a portion of its general account life,
annuity and health business. Total amounts recoverable under these reinsurance contracts include ceded reserves, paid and unpaid claims, and certain other amounts, and totaled $964.8 million and $1.09 billion as of December 31, 2007 and 2006,
respectively. The impact of these contracts on the Companys results of operations is immaterial. Under the terms of the contracts, specified assets have been placed in trusts as collateral for the recoveries. The trust assets are invested in
investment grade securities, the fair value of which must at all times be greater than or equal to 100% or 102% of the reinsured reserves, as outlined in each of the underlying contracts. Certain portions of the Companys variable annuity
guaranteed benefit risks are also reinsured. These treaties reduce the Companys exposure to death benefit and income benefit guarantee risk in the Individual Investments segment. The Company has no other material reinsurance arrangements with
unaffiliated reinsurers.



The Companys
only material reinsurance agreements with affiliates are the modified coinsurance agreements pursuant to which NLIC ceded to other members of Nationwide all of its accident and health insurance business not ceded to unaffiliated reinsurers, as
described in Note 17 to the audited consolidated financial statements included in the F pages of this report.



Ratings



Ratings with respect to claims-paying ability and financial strength are an important factor in establishing the competitive position of insurance companies. These ratings represent each rating agencys opinion of an insurance
companys financial strength, operating performance, strategic position and ability to meet its obligations to policyholders. They are not evaluations directed toward the protection of investors and are not recommendations to buy, sell or hold
securities. Such factors are of concern to policyholders, agents and intermediaries. Furthermore, rating agencies utilize proprietary capital adequacy models to establish ratings for the Company and certain subsidiaries. The Companys ratings
are at risk from changes in these models and the impact that changes in the underlying business in which it is engaged can have on such models. In an effort to minimize the adverse impact of this risk, the Company maintains regular communications
with the rating agencies, performs evaluations using such capital adequacy models, and considers such models in the design of its products and transactions.



Ratings are important to maintaining public confidence in the Company and its ability to market its annuity and life insurance products.
Rating agencies continually review the financial performance and condition of insurers, including the Company. Any lowering of the Companys ratings could have a material adverse effect on the Companys ability to market its products and
could increase the rate of surrender of the Companys products. Both of these consequences could have a material adverse effect on the Companys liquidity and, under certain circumstances, net income. NLIC (and its insurance company
subsidiary) and NLICA (and its main insurance



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company subsidiary) each have financial strength ratings of A+ (Superior) from A.M. Best Company, Inc. (A.M. Best). Both NLIC and NLICAs
claims-paying ability/financial strength are rated Aa3 (Excellent) by Moodys Investors Service, Inc. (Moodys) and AA- (Very Strong) by Standard & Poors Ratings Services, a division of The
McGraw-Hill Companies, Inc. (S&P).



The
Companys financial strength is also reflected in the ratings of its senior notes, subordinated debentures, capital securities issued by a subsidiary trust and commercial paper issued by NLIC. The following table summarizes these ratings as of
December 31, 2007:



|                                                |  |           |  |         |  |     
|----------------------------------------------- |  | --------- |  | ------- |  | ----
|                                                |  | A.M. Best |  | Moodys |  | S&P 
|Senior notes                                    |  | a-        |  | A3      |  | A-  
|Subordinated debentures                         |  | bbb+      |  | Baa1    |  | BBB+
|Capital securities issued by a subsidiary trust |  | bbb+      |  | Baa1    |  | BBB 
|Commercial paper issued by NLIC                 |  | AMB-1     |  | P-1     |  | A-1+



These
ratings are subject to periodic review by A.M. Best, Moodys and S&P, and the maintenance of such ratings cannot be assured. If any rating is reduced from its current level, the Companys financial position and results of operations
could be adversely affected.



Competition



The Company competes with many other insurers as well as
non-insurance financial services companies, including banks, broker/dealers and mutual funds, some of whom have greater financial resources, offer alternative products and, with respect to other insurers, have higher ratings than the Company. While
no single company dominates the marketplace, many of the Companys competitors have well-established national reputations and substantially greater financial resources and market share than the Company. Competition in the Companys lines
of business primarily is based on price, product features, commission structure, perceived financial strength, claims-paying ability, customer and producer service, and name recognition.



Regulation



Regulation at State Level



As an insurance holding company, the Company is subject to regulation by the states in which its insurance subsidiaries are domiciled
and/or transact business. Most states have enacted legislation that requires each insurance holding company and each insurance company in an insurance holding company system to register with the insurance regulatory authority of the insurance
companys state of domicile and annually furnish financial and other information concerning the operations of companies within the holding company system that materially affect the operations, management or financial condition of the insurers
within such a system. Under such laws, a state insurance authority usually must approve in advance the direct or indirect acquisition of 10% or more of the voting securities of an insurance company domiciled in its state.



The Company is subject to the insurance holding company laws
in the States of Ohio, Pennsylvania and Delaware. Under such laws, all transactions within an insurance holding company system affecting insurers must be fair and equitable, and each insurers policyholder surplus following any such transaction
must be both reasonable in relation to its outstanding liabilities and adequate for its needs. These insurance holding company laws also require prior notice or regulatory approval of the change of control of an insurer or its holding company,
material intercorporate transfers of assets within the holding company structure and certain other material transactions involving entities within the holding company structure.



The Companys insurance subsidiaries are regulated and supervised in the jurisdictions in which they do
business. Among other things, states regulate operating licenses; agent licenses; advertising and marketing practices; the form and content of insurance policies, including pricing; the type and amount of investments;



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statutory capital requirements; payment of dividends by insurance company subsidiaries; assessments by guaranty associations; affiliate transactions; and
claims practices. These regulations are primarily intended to protect policyholders rather than shareholders. The Company cannot predict the effect that any proposed or future legislation may have on the financial condition or results of operations
of the Company.



Insurance companies are
required to file detailed annual and quarterly statutory financial statements with state insurance regulators in each of the states in which they do business, and their business and accounts are subject to examination by such agencies at any time.
In addition, insurance regulators periodically examine an insurers financial condition, adherence to statutory accounting practices, and compliance with insurance department rules and regulations. Applicable state insurance laws, rather than
federal bankruptcy laws, apply to the liquidation or restructuring of insurance companies. Changes in regulations, or in the interpretation of existing laws or regulations, may adversely impact pricing, reserve adequacy or exposure to litigation and
could increase the costs of regulatory compliance by the Companys insurance subsidiaries. Any proposed or future state legislation or regulations may negatively impact the Companys financial position or results of operations.



As part of their routine regulatory oversight process,
state insurance departments periodically conduct detailed examinations of the books, records and accounts of insurance companies domiciled in their states. Such examinations generally are conducted in cooperation with the insurance departments of
multiple states under guidelines promulgated by the National Association of Insurance Commissioners (NAIC). The most recently completed financial examination of NLIC, Nationwide Life and Annuity Insurance Company (NLAIC), Nationwide Life Insurance
Company of America (NLICA), Nationwide Life and Annuity Company of America (NLACA) and Nationwide Life Insurance Company of Delaware was conducted by the Ohio Department of Insurance (ODI) for the five-year period ended December 31, 2006 on
behalf of itself and several other states. The examination was completed during the first quarter of 2008 and did not result in any significant issues or adjustments. The ODI, in addition to the departments of insurance of two other states involved
with the exam, Pennsylvania and Delaware, issued reports for their respective domiciliary companies.



State insurance regulatory authorities regularly make inquiries, hold investigations and administer market conduct examinations with respect to insurers compliance with applicable insurance
laws and regulations. NLIC, NLAIC, NLICA and NLACA are currently undergoing regulatory market conduct examinations in eight states. The Companys insurance subsidiaries continuously monitor sales, marketing and advertising practices and related
activities of their agents and personnel and provide continuing education and training in an effort to ensure compliance with applicable insurance laws and regulations. There can be no assurance that any non-compliance with such applicable laws and
regulations would not have a material adverse effect on the Company.



In December 2004, the NAIC adopted model legislation implementing new disclosure requirements with respect to compensation of insurance producers. In 2005, related state legislation was adopted in a few states and
focused on the producer rather than the insurance company. Although the Company is not aware of regulatory or legislative developments or proposals regarding producer compensation disclosure that would have a material impact on its operations, the
NAIC maintains a task force that will continue to review producer compensation disclosure requirements, and additional changes that could impact the Company are possible.



Regulation of Dividends and Other Payments from Insurance Subsidiaries



As an insurance holding company, NFS ability to meet
debt service obligations and pay operating expenses and dividends depends primarily on the receipt of sufficient funds from its primary operating subsidiary, NLIC. The inability of NLIC to pay dividends to NFS in an amount sufficient to meet debt
service obligations and pay operating expenses and dividends would have a material adverse effect on the Company. The payment of dividends by NLIC is subject to restrictions set forth in the insurance laws and regulations of the State of Ohio, its
domiciliary state. The State of Ohio insurance laws require Ohio-domiciled life insurance companies to seek prior regulatory approval to pay a dividend or distribution of cash or other property if the fair market value thereof, together with



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that of other dividends or distributions made in the preceding 12 months, exceeds the greater of (1) 10% of statutory-basis policyholders surplus
as of the prior December 31 or (2) the statutory-basis net income of the insurer for the prior year. During the year ended December 31, 2007, NLIC paid dividends of $537.5 million to NFS, including a $242.5 million extraordinary
dividend paid after obtaining approval from the ODI. NLICs statutory capital and surplus as of December 31, 2007 was $2.50 billion, and statutory net income for 2007 was $309.0 million. As of January 1, 2008, NLIC could not pay
dividends to NFS without obtaining prior approval. As of April 2008, NLIC will be able to pay dividends to NFS totaling $246.5 million upon providing prior notice to the ODI. On February 20, 2008, NLIC declared a dividend of $246.5 million payable
to NFS in April 2008. NLIC will provide notice to the ODI before paying this dividend to NFS.



The State of Ohio insurance laws also require insurers to seek prior regulatory approval for any dividend paid from other than earned surplus. Earned surplus is defined under the State of Ohio
insurance laws as the amount equal to the Companys unassigned funds as set forth in its most recent statutory financial statements, including net unrealized capital gains and losses or revaluation of assets. Additionally, following any
dividend, an insurers policyholder surplus must be reasonable in relation to the insurers outstanding liabilities and adequate for its financial needs. The payment of dividends by NLIC may also be subject to restrictions set forth in the
insurance laws of the State of New York that limit the amount of statutory profits on NLICs participating policies (measured before dividends to policyholders) available for the benefit of the Company and its shareholders.



The ability of NLICA to pay dividends to NFS is subject to
regulation under Pennsylvania insurance law. Under Pennsylvania insurance laws, unless the Pennsylvania Insurance Department (PID) either approves or does not disapprove payment within 30 days after being notified, NLICA may not pay any cash
dividends or other non-stock distributions to NFS during any 12-month period if the total payments exceed the greater of (1) 10% of statutory-basis policyholders surplus as of the prior December 31 or (2) the statutory-basis net
income of the insurer for the prior year. NLICA paid a dividend of $75.0 million to NFS in 2007. The statutory capital and surplus of NLICA as of December 31, 2007 was $674.0 million, and statutory net income for the year ended
December 31, 2007 was $91.6 million. As of January 1, 2008, NLICA could not pay dividends to NFS without obtaining prior approval.



NFS currently does not expect such regulator requirements to impair the ability of its insurance company subsidiaries to pay sufficient
dividends in order for NFS to have the necessary funds available to meet its obligations.



Risk-Based Capital Requirements



In order to enhance the regulation of insurer solvency, the NAIC has adopted a model law to implement risk-based capital (RBC) requirements for life insurance companies. The requirements are designed to monitor
capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. The model law measures four major areas of risk facing life insurers: (1) the risk of loss from asset defaults and asset value fluctuation;
(2) the risk of loss from adverse mortality (the relative incidence of death in a given time) and morbidity (the relative incidence of disability resulting from disease or physical impairment) experience; (3) the risk of loss from
mismatching of asset and liability cash flow due to changing interest rates; and (4) business risks. Insurers having less statutory surplus than required by the RBC model formula will be subject to varying degrees of regulatory action depending
on the level of capital inadequacy.



Based on
the formula adopted by the NAIC, the adjusted capital of all of the Companys insurance subsidiaries as of December 31, 2007 exceeded the levels at which the Company would be required to take corrective action.



Assessments Against and Refunds to Insurers



Insurance guaranty association laws exist in each state, the
District of Columbia and the Commonwealth of Puerto Rico. Insurers doing business in any of these jurisdictions can be assessed for policyholder losses incurred by insolvent insurance companies. The amount and timing of any future assessment on or
refund to the



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Companys insurance subsidiaries under these laws cannot be reasonably estimated and are beyond the control of the Company and its insurance
subsidiaries. A large part of the assessments paid by the Companys insurance subsidiaries pursuant to these laws may be used as credits for a portion of the Companys insurance subsidiaries premium taxes. For the years ended
December 31, 2007, 2006 and 2005, net premium tax refunds received by the Company were immaterial.



Securities Laws



Certain of the Companys insurance subsidiaries and certain policies and contracts offered by them are subject to regulation under
the federal securities laws administered by the U.S. Securities and Exchange Commission (SEC) and under certain state securities laws. Certain separate accounts of the Companys insurance subsidiaries are registered as investment companies
under the Investment Company Act of 1940, as amended (Investment Company Act). Separate account interests under certain variable annuity contracts and variable insurance policies issued by the Companys insurance subsidiaries are also
registered under the Securities Act of 1933, as amended. Certain other subsidiaries of the Company are registered as broker/dealers under the Securities Exchange Act of 1934, as amended (Securities Exchange Act), and are members of, and subject to
regulation by, the Financial Industry Regulatory Authority. Certain subsidiaries of the Company are also subject to the SECs net capital rules.



Certain of the Companys subsidiaries are investment advisors registered under the Investment Advisors Act of 1940, as amended, and
the Securities Act of 1933, as amended. The investment companies managed by such subsidiaries are registered with the SEC under the Investment Company Act, and the shares of certain of these entities are qualified for sale in certain states and the
District of Columbia. A subsidiary of the Company is registered with the SEC as a transfer agent.



All aspects of the Companys subsidiaries investment advisory activities are subject to applicable federal and state laws and regulations in the jurisdictions in which they conduct
business. These laws and regulations primarily are intended to benefit investment advisory clients and investment company shareholders and generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the
transaction of business for failure to comply with such laws and regulations. In such event, the possible sanctions which may be imposed include the suspension of individual employees, limitations on the activities in which the investment advisor
may engage, suspension or revocation of the investment advisors registration as an advisor, censure and fines.



Unitary Savings and Loan Holding Company Status



Nationwide Bank is a federal savings bank chartered by and subject to comprehensive regulation and periodic examination by the Office of
Thrift Supervision (OTS) of the U.S. Department of the Treasury. As a result of the Companys ownership of Nationwide Bank, the Company is a unitary savings and loan holding company subject to regulation by the OTS and the provisions of the
Home Owners Loan Act of 1933 (Home Owners Loan Act). As a unitary savings and loan holding company, the Company generally is not restricted as to the types of business activities in which it may engage, so long as Nationwide Bank
continues to meet the qualified thrift lender test (QTL Test). Under the Home Owners Loan Act, existing unitary savings and loan holding companies such as the Company are grandfathered with full powers to continue and expand their current
activities. However, if the Company should fail to qualify as a unitary savings and loan holding company (as a result of failure of the QTL Test or otherwise), then the types of activities in which the Company and its non-savings association
subsidiaries would be able to engage would generally be limited to those eligible for bank holding companies (subject, however, to the Companys ability to elect status as a financial holding company under the Bank Holding Company Act of 1956,
as amended by the Gramm-Leach-Bliley Act of 1999).



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ERISA Considerations



On December 13, 1993, the U.S. Supreme Court issued its opinion in John Hancock Mutual Life
Insurance Company v. Harris Trust and Savings Bank,holding that certain assets in excess of amounts necessary to satisfy guaranteed obligations held by Hancock in its general account under a participating group annuity contract are plan
assets and therefore subject to certain fiduciary obligations under the Employee Retirement Income Security Act of 1974, as amended (ERISA). ERISA requires that fiduciaries perform their duties solely in the interest of ERISA plan participants
and beneficiaries, and with the care, skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Court imposed
ERISA fiduciary obligations to the extent that the insurers general account is not reserved to pay benefits under guaranteed benefit policies (i.e., benefits whose value would not fluctuate in accordance with the insurers investment
experience).



The U.S. Secretary of Labor
issued final regulations on January 5, 2000, providing guidance for determining, in cases where an insurer issues one or more policies backed by the insurers general account to or for the benefit of an employee benefit plan, which assets
of the insurer constitute plan assets for purposes of ERISA and the IRC. The regulations apply only with respect to a policy issued by an insurer to an ERISA plan on or before December 31, 1998. In the case of such a policy, most provisions of
the regulations became applicable on July 5, 2001. Generally, where the basis of a claim is that insurance company general account assets constitute plan assets, no person will be liable under ERISA or the IRC for conduct occurring prior to
July 5, 2001. However, certain provisions under the final regulations are applicable as follows: (1) certain contract termination features became applicable on January 5, 2000 if the insurer engages in certain unilateral actions; and
(2) the initial and separate account disclosure provisions became applicable July 5, 2000. New non-guaranteed benefit policies issued after December 31, 1998 subject the issuer to ERISA fiduciary obligations. Since the Company issues
fixed group annuity contracts that are backed by its general account and used to fund employee benefit plans, the Company is subject to these requirements.



Tax Legislation



The American Jobs Creation Act of 2004 modified and codified the rules applicable to nonqualified deferred compensation plans, a market in
which the Company provides services and products. The Pension Protection Act of 2006 imposed new conditions that must be met in order for death benefits from certain employer-owned life insurance contracts to continue to be received income tax-free.
In addition, numerous changes were made to simplify the administration and operation of retirement programs such as individual retirement accounts and IRC Section 401(k) plans. In July 2007, the Internal Revenue Service (IRS) released new
regulations regarding IRC Section 403(b) retirement arrangements, substantially increasing the administrative responsibilities of Section 403(b) contract issuers. These legislative and regulatory changes may lessen the competitive
advantage of certain of the Companys products compared to other investments. As a result, demand for certain of the Companys products and services may be negatively impacted.



The U.S. Congress periodically has considered possible legislation that would eliminate many of the tax
benefits currently afforded to annuity products. In November 2005, the Presidents Advisory Panel on Federal Tax Reform issued a report containing proposals, which if enacted as proposed, could materially reduce the tax advantages of purchasing
variable annuity and cash value life insurance products as compared to other investment vehicles. The report included several proposals regarding the creation of tax-advantaged retirement and life savings accounts that were similar to proposals
previously made by the Bush administration. Although the proposals have not been enacted, those proposals, or other similar proposals, could be introduced for enactment in future periods.



Employees



As of December 31, 2007, the Company had approximately 4,800 employees, none of which were covered by a collective bargaining
agreement.



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Available Information



The Company files electronically with the SEC its Current Reports on Form 8-K, Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K
and other reports, which are available on the SECs web site (http://www.sec.gov). In addition, all reports filed by the Company with the SEC may be read and copied at the SECs Public Reference Room located at 100 F Street, N.E., Room
1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The Company also makes available these reports, free of charge, on its web site under the SEC Filings
subsection of the Investor Relations area (http://www.nationwidefinancial.com). The Companys Code of Conduct, Governance Guidelines, Audit Committee Charter, Compensation Committee Charter, Governance Committee Charter, Finance Committee
Charter and other corporate governance documents are also available on the Companys web site. Copies of these documents are also available from the Company free of charge. Requests for copies should be made to Mark Barnett, Vice
PresidentInvestor Relations, One Nationwide Plaza, Columbus, Ohio 43215-2220, or via telephone at 614-249-8437.



16



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##### Table of Contents

ITEM 1A    RISK FACTORS



Changes in general economic and market conditions and interest rates may significantly affect the value of the Companys investment portfolio.



The Companys investment portfolio primarily consists
of fixed-income securities and mortgage loans on real estate. The market values of these invested assets fluctuate depending on general economic and market conditions and the interest rate environment. For example, if interest rates rise, the
investments generally will decrease in value. If interest rates decline, the investments generally will increase in value with the possible exception of mortgage-backed securities (MBSs), which may decline due to higher prepayments on the mortgages
underlying the securities.



MBSs, including
collateralized mortgage obligations (CMOs), are subject to prepayment risks that vary with interest rates, among other things. During periods of declining interest rates, MBSs generally prepay faster as the underlying mortgages are prepaid and/or
refinanced by borrowers in order to take advantage of lower rates. MBSs that have an amortized cost greater than par (i.e., purchased at a premium) may incur a reduction in yield or a loss as a result of such prepayments. In addition, during such
periods, the Company generally will be unable to reinvest the proceeds of any such prepayment at comparable yields. Conversely, during periods of rising interest rates, the frequency of prepayments generally decreases. MBSs that have an amortized
value less than par (i.e., purchased at a discount) may incur a decrease in yield or a loss as a result of slower prepayments.



There can be no assurance that management will be able to successfully manage the negative impact of interest rate changes. Additionally,
for business, regulatory or other reasons, the Company periodically may elect or be required to sell certain of its invested assets when their fair values are less than their original cost, resulting in realized capital losses.



Changes in interest rates and in the financial markets may reduce the
Companys interest spread income, earnings and sales.



The Company is exposed to various interest rate risks. Many of the products contain guarantees that require the Company to credit at least a minimum rate of interest to policyholders. In addition, for competitive
reasons, the Company may at times continue to credit above-minimum interest rates to policyholders despite reductions in prevailing market interest rates. Current crediting rates for many of the Companys individual annuity products are at or
near the contractual minimum rates. Decreases in market interest rates would result in declines in the portfolio yield on investments backing the Companys individual annuity products. A reduction in interest spread income, the difference
between the interest rates that the Company credits policyholders and the yield the Company is able to earn on investments, may reduce earnings. If policyholders cancel their policies or withdraw the cash values of their policies to seek better
investment yields in response to changing interest rates, the Companys revenues are likely to decrease. If market interest rates decline, net investment income will decrease if higher-yielding fixed-income securities mature or are redeemed and
the proceeds must be reinvested in lower-yielding securities.



Volatility in interest rates and equity markets could reduce consumer demand for the Companys products and result in lower sales.



Changes in interest rates may negatively impact the Companys liquidity.



Significant increases in prevailing interest rates may cause
the Companys policyholders to withdraw the cash value of their policies as they seek more attractive returns. If large numbers of policyholders or policyholders with large balances withdraw their policy values, the Company may be required to
borrow funds or liquidate investments to raise the cash necessary to fund their withdrawals. Particularly in periods of volatile interest rates, liquidations can result in capital losses to the Company. Because volatile interest rates often make
fixed-income investments, such as mortgages and privately placed bonds, more difficult to sell, there also is a risk that the Company will find it difficult to raise the cash necessary to fund significant withdrawal activity.



17



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##### Table of Contents

A decline in the equity markets can cause the values of the Companys separate account assets
to decline, reduce revenues, increase claims, increase payment obligations under guaranteed contracts and result in the accelerated amortization of deferred policy acquisition costs (DAC).



A significant source of revenues for the Company is derived
from asset management fees, which are calculated as a percentage of separate account assets. Gains and losses in the equity markets will result in corresponding increases or decreases in separate account assets and asset management fee revenue. In
addition, a decrease in separate account assets may decrease the Companys expectations of future profit margins due to a decrease in asset fee revenue and/or an increase in guaranteed contract claims, which also may require the Company to
accelerate amortization of DAC. See Part II, Item 7AQuantitative and Qualitative Disclosures About Market RiskEquity Market Risk for a complete discussion of risk factors related to equity market risk, including guaranteed
contracts.



Recent developments in the residential
mortgage market, especially the sub-prime market, may adversely affect the Companys financial condition.



Recently, the residential mortgage market in the United States has deteriorated due to changing economic conditions. The Company has
exposure to the sub-prime mortgage market due to certain investment portfolio holdings (see Part II, Item 7MD&AInvestmentsMortgage-Backed and Asset-Backed Securities for further details). While the value of some of
the Companys mortgage securities has declined, management believes these declines in value are temporary and has the intent to hold to recovery. In addition, even though the Company closely monitors these holdings for impairment, the current
valuation volatility and potential credit decline increase the Companys overall risk of loss.



Deviations from assumptions regarding future persistency, mortality, morbidity and interest rates used in calculating reserve amounts could have a material adverse impact on the
Companys consolidated net income.



The process of calculating reserve amounts for a life insurance organization involves the use of a number of assumptions, including those related to persistency (how long a contract stays with a company), mortality, morbidity and interest
rates (the rates expected to be paid or received on financial instruments, including insurance or investment contracts). Actual results could differ significantly from those assumed. As such, deviations from one or more of these assumptions could
result in a material adverse impact on the Companys consolidated net income.



A decline in the Companys financial strength ratings could adversely affect the Companys operations.



See Part I, Item 1BusinessRatings for a description of risk factors related to ratings.



The Companys insurance subsidiaries are subject to extensive
regulations designed to benefit or protect policyholders rather than the Company.



See Part I, Item 1BusinessRegulationRegulation at State Level for a general description of the regulations designed to benefit or protect policyholders. Changes in
regulations or in the interpretation of existing laws or regulations may adversely impact pricing, reserve adequacy or exposure to litigation and could increase the costs of regulatory compliance by the Companys insurance subsidiaries. Any
proposed or future state legislation or regulations may negatively impact the Companys financial position or results of operations.



Certain changes in federal laws and regulations may adversely affect the Companys financial position or results of operations.



Although the federal government does
not directly regulate the insurance industry, federal legislation, administrative policies and court decisions may significantly and adversely affect certain areas of the Companys business. In addition to product tax issues, these areas
include pension and employee welfare benefit plan



18



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##### Table of Contents

regulation, financial services regulation and taxation generally. For example, the following events could adversely affect the Companys business:



| |  |  | changes in laws such as ERISA, as amended, that apply to group annuities (see Part I, Item 1BusinessRegulationERISA Considerations
for a complete discussion of ERISA);
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in tax laws that would reduce or eliminate the tax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance
products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | repeal of the federal estate tax;
| | - |  | ---------------------------------



| |  |  | changes in the availability of, or rules concerning the establishment and operation of, Section 401, 403(b) and 457 plans or individual retirement accounts;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in tax laws (see Part I, Item 1BusinessRegulationTax Legislation for a description of risk factors related to potential tax
legislation and Tax Matters in Note 18 to the audited consolidated financial statements included in the F pages of this report for information regarding the Companys separate account dividends received reduction); or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in tax regulations, such as the proposed regulations that would alter the way tax sheltered annuities described in Section 403(b) of the IRC may be
offered and sold.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Litigation or
regulatory actions in connection with late trading, market timing, compensation and bidding arrangements, unsuitable sales and replacements, the use of finite reinsurance and/or other sales practices could have a material adverse impact on the
Company.



See Part I,
Item 3Legal Proceedings for a description of litigation and regulatory actions. These and future litigation matters may negatively affect the Company by resulting in the payment of substantial awards or settlements, increasing legal
and compliance costs, requiring the Company to change certain aspects of its business operations, diverting management attention from other business issues or harming the Companys reputation with customers.



Certain changes in accounting and/or financial reporting standards
issued by the Financial Accounting Standards Board (FASB), the SEC or other standard-setting bodies could have a material adverse impact on the Companys financial position or results of operations.



The Company is subject to the application of U.S. generally
accepted accounting principles (GAAP), which periodically are revised and/or expanded. As such, the Company periodically is required to adopt new or revised accounting and/or financial reporting standards issued by recognized accounting standard
setters or regulators, including the FASB and the SEC. It is possible that future requirements could change the Companys current application of GAAP, resulting in a material adverse impact on the Companys financial position or results of
operations.



The continued threat of terrorism and
ongoing military and other actions may result in decreases in the Companys consolidated net income, revenue and assets under management and may adversely impact the Companys consolidated investment portfolio.



The continued threat of terrorism within the U.S. and
abroad, ongoing military and other actions, and heightened security measures in response to these types of threats may cause significant volatility and declines in the U.S., European and other securities markets, loss of life, property damage,
additional disruptions to commerce and reduced economic activity. Actual terrorist attacks could cause a decrease in the Companys consolidated net income and/or revenue as a result of decreased economic activity and/or payment of claims. In
addition, some of the assets in the Companys investment portfolio may be adversely affected by declines in the securities markets and economic activity caused by the continued threat of terrorism, ongoing military and other actions and
heightened security measures.



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##### Table of Contents

The Company cannot predict whether or the extent to which industry sectors in which the
Company maintains investments may suffer losses as a result of potential decreased commercial and economic activity, how any such decrease might impact the ability of companies within the affected industry sectors to pay interest or principal on
their securities, or how the value of any underlying collateral might be affected.



Although the Company does not believe that the continued threat of terrorist attacks will have any material impact on the Companys financial strength or performance, the Company can offer
no assurances that this threat, future terrorist-like events in the U.S. and abroad, or military actions by the U.S. will not have a material adverse impact on the Companys business, financial position or results of operations.



The Company operates in a highly competitive industry, which can
significantly impact operating results.



See Part I, Item 1BusinessCompetition for a description of competitive factors affecting the Company.The Companys revenues and profitability could be impacted negatively due to competition.



Unauthorized data access and other security breaches could have an
adverse impact on the Companys business and reputation.



Security breaches and other improper accessing of data in the Companys facilities, networks or databases could result in loss or theft of data and information or systems interruptions that may expose the Company
to liability and have an adverse impact on the Companys business. Moreover, any compromise of the security of the Companys data could harm the Companys reputation and business. There can be no assurances that the Company will be
able to implement security measures to prevent such security breaches.



ITEM 1B    UNRESOLVED STAFF COMMENTS



None.



ITEM 2    PROPERTIES



Pursuant to an arrangement between NMIC and certain of its subsidiaries, during 2007 the Company leased on average approximately 898,000 square feet of office space in the three-building home
office complex and in other offices in central Ohio. In addition, the Company leases approximately 120,000 square feet of office space in Berwyn, Pennsylvania (of which approximately 90,000 square feet are subleased) and owns approximately 160,000
square feet of office space in Newark, Delaware (of which approximately 15,000 square feet are subleased to an affiliate). The Company believes that its present and planned facilities are adequate for the anticipated needs of the Company.



ITEM 3    LEGAL PROCEEDINGS



See Note 18 to the audited consolidated financial statements included in the F pages of this report for a discussion of legal proceedings.



ITEM 4    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



During the fourth quarter of 2007, no matters were submitted to a vote of security holders, through the solicitation of proxies or
otherwise.



20



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##### Table of Contents

PART II



|ITEM 5 | MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------ | -----------------------------------------------------------------------------------------------



The Class A common stock of NFS is traded on the New
York Stock Exchange under the symbol NFS. As of February 26, 2008, NFS had 111,143 registered shareholders of Class A common stock.



There is no established public trading market for the Companys Class B common stock. All 91,778,717 shares of Class B common stock
are owned by Nationwide Corp.



The following
table presents quarterly high, low and closing sales prices of NFS Class A common stock and cash dividends declared on such shares for each quarter of 2007 and 2006:



|                   |  |              |       |                   |   |         |  |   |       |  |   |     
|------------------ |  | ------------ | ----- | ----------------- | - | ------- |  | - | ----- |  | - | ----
|                   |  | Market price |       | Dividendsdeclared
|Quarter ended      |  | High         |       | Low               |   | Closing | 
|March 31, 2007     |  | $            | 55.80 |                   | $ | 51.84   |  | $ | 53.86 |  | $ | 0.26
|June 30, 2007      |  |              | 64.74 |                   |   | 54.05   |  |   | 63.22 |  |   | 0.26
|September 30, 2007 |  |              | 65.52 |                   |   | 45.32   |  |   | 53.82 |  |   | 0.26
|December 31, 2007  |  |              | 55.60 |                   |   | 41.78   |  |   | 45.01 |  |   | 0.26
|                   |  |              |       |                  
|March 31, 2006     |  | $            | 44.94 |                   | $ | 41.73   |  | $ | 43.02 |  | $ | 0.23
|June 30, 2006      |  |              | 44.50 |                   |   | 42.46   |  |   | 44.08 |  |   | 0.23
|September 30, 2006 |  |              | 48.76 |                   |   | 43.71   |  |   | 48.10 |  |   | 0.23
|December 31, 2006  |  |              | 54.57 |                   |   | 47.83   |  |   | 54.20 |  |   | 0.23



See
Part I, Item 1BusinessRegulationRegulation of Dividends and Other Payments from Insurance Subsidiariesfor information regarding restrictions on the ability of NFS insurance subsidiaries to pay dividends to NFS.



Pursuant to the Nationwide Financial Services,
Inc. Second Amended and Restated Stock Retainer Plan for Non-Employee Directors (Director Stock Retainer Plan), 105 shares of Class A common stock were issued by NFS during the fourth quarter of 2007, at an average price of $47.47 per share, to
NFS directors who are not employees of NFS or its affiliates. This was a partial payment of the annual stock retainer for 2007 paid by NFS to such directors in consideration of serving as directors of the Company. The Chairman of the Board receives
a supplemental annual retainer of $40,000 for his additional duties, which in 2007 was paid monthly one-half in cash and one-half in shares of the Companys Class A common stock. The issuance of such shares is exempt from registration
under the Securities Act of 1933, as amended.



See Note 14 to the audited consolidated financial statements included in the F pages of this report for a description of the Companys share repurchase program activity.



The following table summarizes the information required by Item 703 of Regulation S-K for purchases of
NFS equity securities by NFS or any affiliated purchasers, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act, during the Companys fourth quarter:



|              |  |                                 |  |                             |       |                                                                     |         |                                                                                    |   |      
|------------- |  | ------------------------------- |  | --------------------------- | ----- | ------------------------------------------------------------------- | ------- | ---------------------------------------------------------------------------------- | - | -----
|Period        |  | Total number ofshares purchased |  | Average price paidper share |       | Total number ofshares purchasedas part ofpublicly announcedprograms |         | Approximate value ofshares thatmay yet be purchasedunder the programs(in millions)
|October 2007  |  |                                |  |                             | N/A   |                                                                     |        |                                                                                    |   |     
|November 2007 |  |                                |  |                             | N/A   |                                                                     |        |                                                                                    |   |     
|December 2007 |  | 646,811                         |  | $                           | 44.91 |                                                                     | 646,811 |                                                                                    | $ | 471.0
|              |  |                                 |  |                             |       |                                                                     |         |                                                                                    |   |      
|Total         |  | 646,811                         |  |                             | 44.91 |                                                                     | 646,811 |                                                                                    |   |     
|              |  |                                 |  |                             |       |                                                                     |         |                                                                                    |   |      



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##### Table of Contents

See Part III, Item 12Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters for additional information required by this item.



The following graph shows a comparison of the Companys cumulative total shareholder return along with the S&P 500 and an index of peer companies (the Peer Group) selected by the Company
for the past five years. The Peer Group includes the following companies: Aflac Incorporated; Genworth Financial, Inc.; Hartford Financial Services Group, Inc.; Lincoln National Corporation; Manulife Financial Corporation; MetLife, Inc.; Principal
Financial Group, Inc.; Protective Life Corporation; and Prudential Financial, Inc. The Peer Group companies included in the peer group have business operations similar to the Company and are considered significant competitors of the Company.



22



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##### Table of Contents

The graph plots the changes in the value of an initial $100 investment over the indicated
time periods, assuming reinvestment of all dividends. Peer Group returns were weighted according to their respective aggregate market capitalization at the beginning of each period shown on the graph.



Comparison of Five-Year Cumulative Total Return

Nationwide Financial Services, Inc., S&P 500 and Peer Group

(Performance Results Through December 31, 2007)



LOGO





|* | Assumes $100 invested at the close of trading on December 31, 2002 in Nationwide Financial Services, Inc. Class A common stock, S&P 500 and Peer
Group.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------



|           |  |            |        |            |   |            |  |            |        |            |   |            |  |   |        |  |   |       
|---------- |  | ---------- | ------ | ---------- | - | ---------- |  | ---------- | ------ | ---------- | - | ---------- |  | - | ------ |  | - | ------
|           |  | 12/31/2002 |        | 12/31/2003 |   | 12/31/2004 |  | 12/31/2005 |        | 12/31/2006 |   | 12/31/2007
|NFS        |  | $          | 100.00 |            | $ | 117.39     |  | $          | 138.44 |            | $ | 162.46     |  | $ | 204.08 |  | $ | 172.84
|S&P 500    |  |            | 100.00 |            |   | 128.69     |  |            | 142.69 |            |   | 149.70     |  |   | 173.34 |  |   | 182.86
|Peer Group |  |            | 100.00 |            |   | 129.11     |  |            | 163.05 |            |   | 203.79     |  |   | 234.98 |  |   | 258.81



There
can be no assurance that the Companys stock performance will continue into the future with the same or similar trends depicted in the preceding graph. The Company will not make or endorse any predictions as to future stock performance.



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##### Table of Contents

ITEM 6    SELECTED CONSOLIDATED FINANCIAL DATA



Five-Year Summary



|                                                      |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |          
|----------------------------------------------------- |  | --------------------------------- | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                      |  | Years ended or as of December 31,
|(in millions, except per share amounts)               |  | 2007                              |           | 2006 |   | 2005      |  | 2004 |           | 2003
|Statements of Income Data:                            |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |          
|Total revenues                                        |  | $                                 | 4,528.9   |      | $ | 4,562.5   |  | $    | 4,416.2   |      | $ | 4,167.9   |  | $ | 3,936.6  
|Income from continuing operations                     |  |                                   | 609.7     |      |   | 727.1     |  |      | 639.0     |      |   | 524.5     |  |   | 414.3    
|Net income                                            |  |                                   | 626.8     |      |   | 724.0     |  |      | 610.4     |      |   | 516.4     |  |   | 407.4    
|                                                      |  |                                   |           |      |  
|Earnings from continuing operations per common share: |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |          
|Basic                                                 |  | $                                 | 4.28      |      | $ | 4.85      |  | $    | 4.18      |      | $ | 3.45      |  | $ | 2.73     
|Diluted                                               |  | $                                 | 4.25      |      | $ | 4.82      |  | $    | 4.16      |      | $ | 3.43      |  | $ | 2.72     
|                                                      |  |                                   |           |      |  
|Earnings per common share:                            |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |          
|Basic                                                 |  | $                                 | 4.40      |      | $ | 4.83      |  | $    | 3.99      |      | $ | 3.40      |  | $ | 2.68     
|Diluted                                               |  | $                                 | 4.37      |      | $ | 4.80      |  | $    | 3.97      |      | $ | 3.38      |  | $ | 2.67     
|                                                      |  |                                   |           |      |  
|Weighted average common shares outstanding:           |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |          
|Basic                                                 |  |                                   | 142.5     |      |   | 149.9     |  |      | 152.9     |      |   | 152.1     |  |   | 151.8    
|Diluted                                               |  |                                   | 143.5     |      |   | 150.7     |  |      | 153.6     |      |   | 152.9     |  |   | 152.3    
|                                                      |  |                                   |           |      |  
|Cash dividends declared per common share              |  | $                                 | 1.04      |      | $ | 0.92      |  | $    | 0.76      |      | $ | 0.72      |  | $ | 0.52     
|Balance Sheets Data:                                  |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |          
|Total assets                                          |  | $                                 | 119,207.1 |      | $ | 119,531.1 |  | $    | 116,361.2 |      | $ | 117,121.2 |  | $ | 111,237.8
|Long-term debt                                        |  |                                   | 1,565.1   |      |   | 1,398.5   |  |      | 1,398.0   |      |   | 1,406.0   |  |   | 1,405.6  
|Shareholders equity                                  |  |                                   | 5,324.6   |      |   | 5,622.7   |  |      | 5,387.6   |      |   | 5,234.0   |  |   | 4,868.9  
|Book value per common share                           |  | $                                 | 38.44     |      | $ | 38.51     |  | $    | 35.33     |      | $ | 34.32     |  | $ | 32.05    
|                                                      |  |                                   |           |      |  
|Segment Data:                                         |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |          
|Customer funds managed and administered:              |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |          
|Individual Investments                                |  | $                                 | 53,587.0  |      | $ | 52,963.6  |  | $    | 51,227.6  |      | $ | 52,481.9  |  | $ | 49,333.9 
|Retirement Plans                                      |  |                                   | 80,546.6  |      |   | 76,597.1  |  |      | 69,850.8  |      |   | 65,428.3  |  |   | 57,334.6 
|Individual Protection                                 |  |                                   | 20,990.5  |      |   | 19,686.8  |  |      | 17,388.6  |      |   | 15,683.0  |  |   | 13,897.1 
|Corporate and Other                                   |  |                                   | 7,241.3   |      |   | 7,662.4   |  |      | 7,017.8   |      |   | 6,703.4   |  |   | 7,133.4  
|                                                      |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |          
|Total                                                 |  | $                                 | 162,365.4 |      | $ | 156,909.9 |  | $    | 145,484.8 |      | $ | 140,296.6 |  | $ | 127,699.0
|                                                      |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |          
|Pre-tax operating earnings:                           |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |          
|Individual Investments                                |  | $                                 | 300.7     |      | $ | 223.1     |  | $    | 250.7     |      | $ | 244.0     |  | $ | 194.6    
|Retirement Plans                                      |  |                                   | 252.6     |      |   | 221.2     |  |      | 191.3     |      |   | 183.3     |  |   | 156.4    
|Individual Protection                                 |  |                                   | 299.8     |      |   | 280.8     |  |      | 266.1     |      |   | 247.3     |  |   | 225.5    
|Corporate and Other                                   |  |                                   | 74.6      |      |   | 65.1      |  |      | 54.9      |      |   | 66.8      |  |   | 52.6     
|                                                      |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |          
|Sales:                                                |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |          
|Individual Investments                                |  | $                                 | 6,126.6   |      | $ | 5,391.1   |  | $    | 4,109.2   |      | $ | 5,338.5   |  | $ | 6,738.8  
|Retirement Plans                                      |  |                                   | 10,691.2  |      |   | 10,010.0  |  |      | 9,509.4   |      |   | 8,912.7   |  |   | 7,719.9  
|Individual Protection                                 |  |                                   | 1,746.4   |      |   | 1,962.0   |  |      | 1,825.2   |      |   | 1,766.8   |  |   | 1,722.5  
|                                                      |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |          
|Total                                                 |  | $                                 | 18,564.2  |      | $ | 17,363.1  |  | $    | 15,443.8  |      | $ | 16,018.0  |  | $ | 16,181.2 
|                                                      |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |          



As
described in Part II, Item 7MD&AOverviewDiscontinued Operations, the results of operations of TBG Financial and The 401(k) Company are reflected as discontinued for 2007 and all prior years. In addition, the results
of operations of Cap Pro Holding, Inc. (Cap Pro), Nationwide Financial Services (Bermuda), Ltd. (NFSB) and William J. Lynch & Associates, Inc. (TBG Lynch) are reflected as discontinued for 2005 and all prior years. As described in Part
II, Item 7MD&AOverviewNationwide Funds Group Acquisition, the results of operations of NFG for 2007 and all prior years are reflected as though the companies were combined for all periods presented.



24



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##### Table of Contents

|ITEM7 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|----- | -------------------------------------------------------------------------------------



TABLE OF CONTENTS



|                                                                      |  |   
|--------------------------------------------------------------------- |  | --
|FORWARD-LOOKING INFORMATION                                           |  | 26
|                                                                      | 
|OVERVIEW                                                              |  | 27
|                                                                      | 
|CRITICAL ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING STANDARDS |  | 30
|                                                                      | 
|RESULTS OF OPERATIONS                                                 |  | 35
|                                                                      | 
|SALES                                                                 |  | 38
|                                                                      | 
|BUSINESS SEGMENTS                                                     |  | 44
|                                                                      | 
|LIQUIDITY AND CAPITAL RESOURCES                                       |  | 60
|                                                                      | 
|CONTRACTUAL OBLIGATIONS AND COMMITMENTS                               |  | 64
|                                                                      | 
|OFF-BALANCE SHEET TRANSACTIONS                                        |  | 66
|                                                                      | 
|INVESTMENTS                                                           |  | 66



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Forward-Looking Information



The information included herein contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the results of operations and businesses of
Nationwide Financial Services, Inc. and subsidiaries (NFS, or collectively, the Company). Whenever used in this report, words such as anticipate, estimate, expect, intend, plan,
believe, project, target and other words of similar meaning are intended to identify such forward-looking statements. These forward-looking statements involve certain risks and uncertainties. Factors that may
cause actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward-looking statements include, among others, the following possibilities:



| | (i) | change in Nationwide Corporations control of the Company through its beneficial ownership of 95.2% of the combined voting power of all the outstanding
common stock and 66.3% of the economic interest in the Company;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | NFS primary reliance, as a holding company, on dividends from its subsidiaries to meet debt service obligations and the applicable regulatory restrictions
on the ability of NFS subsidiaries to pay such dividends;
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | the potential impact on the Companys reported net income and related disclosures that could result from the adoption of certain accounting and/or financial
reporting standards issued by the Financial Accounting Standards Board, the SEC or other standard-setting bodies;
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | tax law changes impacting the tax treatment of life insurance and investment products;
| | ---- | --------------------------------------------------------------------------------------



| | (v) | repeal of the federal estate tax;
| | --- | ---------------------------------



| | (vi) | heightened competition, including specifically the intensification of price competition, the entry of new competitors and the development of new products by new
and existing competitors;
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vii) | adverse state and federal legislation and regulation, including limitations on premium levels, increases in minimum capital and reserves, and other financial
viability requirements; restrictions on mutual fund distribution payment arrangements such as revenue sharing and 12b-1 payments; and regulation changes resulting from industry practice investigations;
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (viii) | failure to expand distribution channels in order to obtain new customers or failure to retain existing customers;
| | ------ | -----------------------------------------------------------------------------------------------------------------



| | (ix) | inability to carry out marketing and sales plans, including, among others, development of new products and/or changes to certain existing products and acceptance
of the new and/or revised products in the market;
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (x) | changes in interest rates and the equity markets causing a reduction of investment income and/or asset fees, an acceleration of the amortization of DAC and/or
value of business acquired (VOBA), a reduction in separate account assets or a reduction in the demand for the Companys products;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xi) | reduction in the value of the Companys investment portfolio as a result of changes in interest rates and yields in the market as well as geopolitical
conditions and the impact of political, regulatory, judicial, economic or financial events, including terrorism, affecting the market generally and companies in the Companys investment portfolio specifically;
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xii) | general economic and business conditions which are less favorable than expected;
| | ----- | --------------------------------------------------------------------------------



| | (xiii) | competitive, regulatory or tax changes that affect the cost of, or demand for, the Companys products;
| | ------ | ------------------------------------------------------------------------------------------------------



| | (xiv) | unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;
| | ----- | ------------------------------------------------------------------------------------------------------------



| | (xv) | settlement of tax liabilities for amounts that differ significantly from those recorded on the balance sheets;
| | ---- | --------------------------------------------------------------------------------------------------------------



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| | (xvi) | deviations from assumptions regarding future persistency, mortality (including as a result of the outbreak of a pandemic illness, such as Avian Flu), morbidity
and interest rates used in calculating reserve amounts and in pricing the Companys products;
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xvii) | adverse litigation results and/or resolution of litigation and/or arbitration or investigation results that could result in monetary damages or impact the manner
in which the Company conducts its operations; and
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xviii) | adverse consequences, including financial and reputation costs, regulatory problems and potential loss of customers resulting from failure to meet privacy
regulations and/or protect the Companys customers confidential information.
| | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Overview



Following is managements discussion and analysis of financial condition and results of operations of the Company for the three years ended December 31, 2007. This discussion should be read in conjunction with the audited
consolidated financial statements and related notes beginning on page F-1 of this report.



See Part I, Item 1BusinessOverview and Part I, Item 1BusinessCapital Stock Transactions for a description of the Company and its ownership
structure.



Business Segments



Management views the Companys business primarily based
on its underlying products and uses this basis to define its four reportable segments: Individual Investments, Retirement Plans, Individual Protection, and Corporate and Other.



The primary segment profitability measure that management uses is pre-tax operating earnings, which is
calculated by adjusting income from continuing operations before federal income taxes and discontinued operations to exclude: (1) net realized investment gains and losses, except for operating items (periodic net amounts paid or received on
interest rate swaps that do not qualify for hedge accounting treatment, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations); and (2) the adjustment to
amortization of DAC and VOBA related to net realized investment gains and losses.



See Part I, Item 1BusinessBusiness Segments for a description of the components of each segment.



The following table summarizes pre-tax operating earnings by segment for the years ended December 31:



|                       |  |      |       |      |   |        |  |      |  |        |       |  |      
|---------------------- |  | ---- | ----- | ---- | - | ------ |  | ---- |  | ------ | ----- |  | -----
|(dollars in millions)  |  | 2007 |       | 2006 |   | Change |  | 2005 |  | Change
|Individual Investments |  | $    | 300.7 |      | $ | 223.1  |  | 35%  |  | $      | 250.7 |  | (11)%
|Retirement Plans       |  |      | 252.6 |      |   | 221.2  |  | 14%  |  |        | 191.3 |  | 16%  
|Individual Protection  |  |      | 299.8 |      |   | 280.8  |  | 7%   |  |        | 266.1 |  | 6%   
|Corporate and Other    |  |      | 74.6  |      |   | 65.1   |  | 15%  |  |        | 54.9  |  | 19%  



Revenues and
Expenses



The Company earns revenues and
generates cash primarily from policy charges, life insurance premiums and net investment income. Policy charges include asset fees, which are earned primarily from separate account values generated from the sale of individual and group variable
annuities and investment life insurance products; cost of insurance charges earned on universal life insurance products, which are assessed on the amount of insurance in force in excess of the related policyholder account value; administrative fees,
which include fees charged per contract on a variety of the Companys products and premium loads on universal life insurance



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products; and surrender fees, which are charged as a percentage of premiums withdrawn during a specified period for annuity and certain life insurance
contracts. Net investment income includes earnings on investments supporting fixed annuities, the MTN program and certain life insurance products, and earnings on invested assets not allocated to product segments, all net of related investment
expenses. Other income includes asset fees, administrative fees, commissions and other income earned by subsidiaries of the Company that provide administrative, marketing, distribution and retail asset management services.



Management makes decisions concerning the sale of invested
assets based on a variety of market, business, tax and other factors. All realized gains and losses generated by these sales, charges related to other-than-temporary impairments of available-for-sale securities and other investments, and changes in
valuation allowances on mortgage loans on real estate are reported in net realized investment gains and losses. Also included are changes in the fair values of derivatives qualifying as fair value hedges and the related changes in the fair values of
hedged items; the ineffective, or excluded, portion of cash flow hedges; changes in the fair values of derivatives that do not qualify for hedge accounting treatment; and periodic net amounts paid or received on interest rate swaps that do not
qualify for hedge accounting treatment.



The
Companys primary expenses include interest credited to policyholder accounts, life insurance and annuity benefits, amortization of DAC and general business operating expenses. Interest credited principally relates to individual and group fixed
annuities, funding agreements backing the NLIC MTN program and certain life insurance products. Life insurance and annuity benefits include policyholder benefits in excess of policyholder accounts for universal life and individual deferred annuities
and net claims and provisions for future policy benefits for traditional life insurance products and immediate annuities.



The Company regularly evaluates and adjusts the DAC balance when actual gross profits in a given reporting period vary from
managements initial estimates, with a corresponding charge or credit to current period earnings. This process is referred to by the Company as a true-up, which is performed, and the resulting impact recognized, on a quarterly
basis. Additionally, the Company regularly evaluates its assumptions regarding the future estimated gross profits used as a basis for amortization of DAC and adjusts the total amortization recorded to date by a charge or credit to earnings if
evidence suggests that these future assumptions and estimates should be revised. This process is referred to by the Company as unlocking. The Company regularly monitors its actual experience with factors impacting its assumptions about
future expected gross profits and other relevant internal and external information regarding those assumptions and unlocks as such information and analysis warrants.



Profitability



The Companys profitability largely depends on its ability to effectively price and manage risk on its various products, administer
customer funds and control operating expenses. Lapse rates on existing contracts also impact profitability. The lapse rate and distribution of lapses affect surrender charges and impact DAC amortization assumptions when lapse experience changes
significantly.



In particular, the
Companys profitability is driven by fee income on separate account products, general and separate account asset levels, and managements ability to manage interest spread income. While asset fees are largely at guaranteed annual rates,
amounts earned vary directly with the underlying performance of the separate accounts. Interest spread income is comprised of net investment income, excluding any applicable allocated charges for invested capital, less interest credited to
policyholder accounts. Interest spread income can vary depending on crediting rates offered by the Company; performance of the investment portfolio, including the rate of prepayments; changes in market interest rates and the level of invested
assets; the competitive environment; and other factors.



In addition, life insurance profits are significantly impacted by mortality, morbidity and persistency experience.



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Discontinued Operations



During the quarter ended December 31, 2007, the Company committed to a plan of sale of its interest in
TBG Financial. Based on managements determination that the carrying value of this business exceeded its estimated fair value (less the estimated cost to sell), the Company recorded a pre-tax loss totaling $49.0 million ($23.3 million, net of
taxes), writing down a portion of the goodwill associated with this business.



Effective March 31, 2007, the Company completed the sale of The 401(k) Company for $115.4 million in cash and recorded a $45.5 million gain, net of taxes.



During the year ended December 31, 2005, management
decided to discontinue the following operations: (1) Cap Pro, a majority-owned subsidiary of NFS that provided broker/dealer, registered investment advisor and insurance agency services to producers of certain certified public accounting firms;
(2) NFSB, a wholly-owned subsidiary of NFS that sold variable and fixed annuity products in offshore markets; and (3) TBG Lynch, a wholly-owned subsidiary of TBG Financial that distributed BOLI products.



The results of operations of TBG Financial and The 401(k)
Company for 2007 and all prior years are reflected as discontinued. The results of operations of Cap Pro, NFSB and TBG Lynch for 2005 are reflected as discontinued. In addition, the sales tables and Other Data section of the Retirement
Plans segment table in the subsequent portions of MD&A exclude amounts applicable to The 401(k) Company. However, the Other Data sections of the tables in the subsequent segment portions of MD&A include amounts applicable to the
operations that were discontinued in 2005. See Note 2(n) to the audited consolidated financial statements included in the F pages of this report for additional information on discontinued operations.



Cumulative Effect of Adoption of Accounting Principle



In September 2005, the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 05-1,Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance
Contracts (SOP 05-1). The Company adopted SOP 05-1 effective January 1, 2007, which resulted in a $6.0 million charge, net of taxes, as the cumulative effect of adoption of this accounting principle. See Note 3 to the audited consolidated
financial statements included in the F pages of this report for a complete description of SOP 05-1.



Nationwide Bank Merger



Nationwide Bank and Nationwide Federal Credit Union (NFCU) entered into an Agreement and Plan of Merger, dated as of June 16, 2006,
pursuant to which Nationwide Bank acquired 100% of the ownership interests in NFCU for $79.0 million in cash. The merger was effective January 1, 2007, with payment of merger consideration to the NFCU membership on January 8, 2007, on a
pro rata basis according to the members deposit account balances as of March 31, 2006.



Nationwide Funds Group Acquisition



On February 2, 2007, NFS entered into a stock purchase agreement with Nationwide Corp. to acquire the Philadelphia-based retail asset
management operations of NWD Investment Management, Inc. The transaction closed on April 30, 2007 with a final purchase price of $244.2 million. The acquired operations are known as NFG. The purchase was accounted for at historical cost in a
manner similar to a pooling of interests because the involved entities are under common control. NFG is reflected in the Companys current and prior year audited consolidated financial statements at the historical cost of the transferred net
assets to provide comparative information as though the companies were combined for all periods presented. The excess purchase price over the historical cost of the acquired net assets was accounted for as a $202.5 million equity transaction.



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Critical Accounting Policies and Recently Issued Accounting Standards



The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual
results could differ significantly from those estimates.



The Companys most critical estimates include those used to determine the following: the balance, recoverability and amortization of DAC for investment and universal life insurance products; impairment losses on
investments; valuation allowances for mortgage loans on real estate; the liability for future policy benefits and claims; and federal income tax provision.



Note 2 and Note 3 to the audited consolidated financial statements included in the F pages of this report provide a summary of significant
accounting policies and a discussion of recently issued accounting standards, respectively.



Deferred Policy Acquisition Costs for Investment and Universal Life Insurance Products



The Company has deferred certain costs of acquiring investment and universal life insurance products business, principally commissions,
certain expenses of the policy issue and underwriting department, and certain variable sales expenses that relate to and vary with the production of new and renewal business. In addition, the Company defers sales inducements, such as interest credit
bonuses and jumbo deposit bonuses. Investment products primarily consist of individual and group variable and fixed deferred annuities in the Individual Investments and Retirement Plans segments. Universal life insurance products include universal
life insurance, variable universal life insurance, COLI, BOLI and other interest-sensitive life insurance policies in the Individual Protection segment. DAC is subject to recoverability testing in the year of policy issuance and loss recognition
testing at the end of each reporting period.



For investment and universal life insurance products, DAC is being amortized with interest over the lives of the policies in relation to the present value of estimated gross profits from projected interest margins, asset fees, cost of
insurance charges, administration fees, surrender charges, and net realized investment gains and losses less policy benefits and policy maintenance expenses. The DAC asset related to investment and universal life insurance products is adjusted to
reflect the impact of unrealized gains and losses on fixed maturity securities available-for-sale, as described in Note 2(b) to the audited consolidated financial statements included in the F pages of this report.



The assumptions used in the estimation of future gross
profits are based on the Companys current best estimates of future events and are reviewed as part of an annual process during the second quarter. During the annual process, the Company performs a comprehensive study of assumptions, including
mortality and persistency studies, maintenance expense studies, and an evaluation of projected general and separate account investment returns. The most significant assumptions that are involved in the estimation of future gross profits include
future net separate account investment performance, surrender/lapse rates, interest margins and mortality. Currently, the Companys long-term assumption for net separate account investment performance is approximately 7% growth per year and
varies by product. This assumption, like others, is reviewed as part of the annual process. If this assumption were unlocked, the date of the unlocking could become the anchor date used in the reversion to the mean process (defined below). Variances
from the long-term assumption are expected since the majority of the investments in the underlying separate accounts are in equity securities, which strongly correlate with the S&P 500 Index in the aggregate. The reversion to the mean process is
based on actual net separate account investment performance from the anchor date to the valuation date. The Company then assumes different performance levels over the next three years such that the separate account mean return measured from the
anchor date to the end of the life of the product equals the long-term assumption. The assumed net separate account investment performance used in the DAC models is intended to reflect what is anticipated. However, based on historical returns of the
S&P 500 Index, and as part of its pre-set parameters, the Companys reversion to the mean process generally limits net separate account investment performance to 0-15% during the three-year reversion period. See below for a discussion of
current year assumption changes.



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Changes in assumptions can have a significant impact on the amount of DAC reported for
investment and universal life insurance products and their related amortization patterns. In the event actual experience differs from assumptions or future assumptions are revised, the Company is required to record an increase or decrease in DAC
amortization expense, which could be significant. In general, increases in the estimated long-term general and separate account returns result in increased expected future profitability and may lower the rate of DAC amortization, while increases in
long-term lapse/surrender and mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization.



In addition to the comprehensive annual study of assumptions, management evaluates the appropriateness of
the individual variable annuity DAC balance quarterly within pre-set parameters. These parameters are designed to appropriately reflect the Companys long-term expectations with respect to individual variable annuity contracts while also
evaluating the potential impact of short-term experience on the Companys recorded individual variable annuity DAC balance. If the recorded balance of individual variable annuity DAC falls outside of these parameters for a prescribed time
period, or if the recorded balance falls outside of these parameters and management determines it is not reasonably possible to get back within the parameters during this time period, assumptions are required to be unlocked, and DAC is recalculated
using revised best estimate assumptions. When DAC assumptions are unlocked and revised, the Company continues to use the reversion to the mean process. See below for a discussion of current year assumption changes.



For variable annuity products, the DAC balance is sensitive
to the effects of changes in the Companys estimates of gross profits, primarily due to the significant portion of the Companys gross profits that are dependent upon the rate of return on assets held in separate accounts. This rate of
return influences fees earned by the Company from these products and costs incurred by the Company associated with minimum contractual guarantees, as well as other sources of future expected gross profits. As previously stated, the Companys
current long-term assumption for net separate account investment performance is approximately 7% growth per year. In its ongoing evaluation of this assumption, the Company monitors its historical experience, market information and other relevant
trends. To demonstrate the sensitivity of both the Companys variable annuity product DAC balance, which was approximately $1.9 billion in aggregate at December 31, 2007, and related amortization, a 1% increase (to 8%) or decrease (to 6%)
in the long-term assumption for net separate account investment performance would result in an approximately $20 million net increase or net decrease, respectively, in DAC amortization over the following year. These fluctuations are reasonably
likely to occur. The information provided above considers only changes in the assumption for long-term net separate account investment performance and excludes changes in other assumptions used in the Companys evaluation of DAC.



At the end of the second quarter of 2007, the Company
determined as part of its analysis of DAC that the overall profitability of separate account products is expected to exceed previous estimates due to favorable financial market trends. Accordingly, the Company unlocked its DAC assumptions after
completing a comprehensive review of assumptions used to project DAC and other related balances, including sales inducement assets, VOBA, unearned revenue reserves, and guaranteed minimum death and income benefit reserves. This review covered all
assumptions including expected separate account investment returns, lapse rates, mortality and expenses. Additionally, while the Company estimates that the overall profitability of its variable products has improved, it also expects the long-term
net growth in separate account investment performance to moderate. As a result of its current analysis, including its evaluation of ongoing trends and expectations regarding financial market performance, the Company reduced its long-term net
separate account growth rate assumption from approximately 8% to approximately 7%. The Company unlocked assumptions, as appropriate, for all investment and variable universal life insurance products in order to remain consistent across product lines
using revised assumptions which reflect the Companys current best estimate of future events. Therefore, in the second quarter of 2007, the Company recorded a net increase in DAC and a benefit to DAC amortization and other related balances
totaling $216.5 million pre-tax, which was reported in the following segments in the pre-tax amounts indicated: Individual Investments$196.4 million; Retirement Plans$10.5 million; and Individual Protection$9.6 million, net of a
$5.1 million charge for the acceleration of amortization of VOBA.



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The most significant assumption changes that resulted from the Companys unlocking
decisions were resetting the anchor date for reversion to the mean calculations to June 30, 2007, resulting in resetting the assumption for net separate account growth to approximately 7% during the three-year reversion period; resetting the
long-term assumption for net separate account growth and the discount rate used to calculate the present value of estimated gross profits to approximately 7% (formerly approximately 8%); and increasing estimated lapse rates for fixed annuity and
BOLI products.



During the second quarter of
2007, the Company added a new feature to its existing guaranteed minimum withdrawal benefit rider, Lifetime Income (L.inc). This new feature results in a substantial change in the existing contracts and, therefore, an extinguishment of the DAC
associated with those contracts pursuant to Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts. As a result, existing DAC and
other related balances were eliminated resulting in a $135.0 million pre-tax charge.



Impairment Losses on Investments



Management regularly reviews each investment in its fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of
investments.



For debt and equity securities
not subject to Emerging Issues Task Force Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets (EITF 99-20), an other-than-temporary impairment
charge is taken when the Company does not have the ability and intent to hold the security until the forecasted recovery or if it is no longer probable that the Company will recover all amounts due under the contractual terms of the security. Many
criteria are considered during this process including, but not limited to, the current fair value as compared to cost or amortized cost, as appropriate, of the security; the amount and length of time a securitys fair value has been below cost
or amortized cost; specific credit issues and financial prospects related to the issuer; managements intent to hold or dispose of the security; and current economic conditions. Other-than-temporary impairment losses result in a permanent
reduction to the cost basis of the underlying investment.



In addition to the above, for certain securitized financial assets with contractual cash flows, including asset-backed securities, EITF 99-20 also requires the Company to periodically update its best estimate of cash
flows over the life of the security. If the fair value of a securitized financial asset is not greater than or equal to its carrying value based on current information and events, and if there has been an adverse change in estimated cash flows since
the last revised estimate (considering both timing and amount), then the Company recognizes an other-than-temporary impairment and writes down the investment to fair value.



Impairment losses are recorded on investments in long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts.



A significant change in impairment losses reported in the consolidated financial statements may result if one of the factors that
management considers when evaluating investments for impairment changes significantly, such as the deterioration in the credit worthiness of individual issuers, market liquidity or performance of underlying collateral.



Valuation Allowances for Mortgage Loans on Real Estate



The Company provides valuation allowances for impairments of
mortgage loans on real estate based on a review by portfolio managers. Mortgage loans on real estate are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due
according to the



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contractual terms of the loan agreement. When management determines that a loan is impaired, a provision for loss is established equal to the difference
between the carrying value and the present value of expected future cash flows discounted at the loans effective interest rate, or the fair value of the collateral, if the loan is collateral dependent. In addition to the valuation allowance on
specific loans, the Company maintains an unallocated allowance for probable losses inherent in the loan portfolio as of the balance sheet date, but not yet specifically identified by loan. Changes in the valuation allowance are recorded in net
realized investment gains and losses. Loans in foreclosure are placed on non-accrual status. Interest received on non-accrual status mortgage loans on real estate is included in net investment income in the period received.



The valuation allowance account for mortgage loans on real
estate is maintained at a level believed adequate by management and reflects managements best estimate of probable credit losses, including losses incurred at the balance sheet date but not yet identified by specific loan. Managements
periodic evaluation of the adequacy of the allowance for losses is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers ability to repay, the estimated value of the
underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors.



Significant changes in the factors management considers in determining the valuation allowance for mortgage loans on real estate could
result in a significant change in the valuation allowance reported in the consolidated financial statements.



Future Policy Benefits and Claims



The process of calculating reserve amounts for a life insurance organization involves the use of a number of assumptions, including those
related to persistency, mortality, morbidity and interest rates.



The Company calculates its liability for future policy benefits and claims for investment products in the accumulation phase and universal life and variable universal life insurance policies as the policy account
balance, which represents participants net premiums and deposits plus investment performance and interest credited less applicable contract charges.



The Companys liability for funding agreements to an unrelated third party trust related to the Companys MTN program equals the
balance that accrues to the benefit of the contractholder, including interest credited. The funding agreements constitute insurance obligations and are considered annuity contracts under Ohio insurance laws.



The liability for future policy benefits and claims for
traditional life insurance policies was determined using the net level premium method using interest rates varying from 2.0% to 10.5% and estimates of mortality, morbidity, investment yields and withdrawals that were used or being experienced at the
time the policies were issued.



The liability
for future policy benefits for payout annuities was calculated using the present value of future benefits and maintenance costs discounted using interest rates varying generally from 3.0% to 13.0%.



Federal Income Taxes



Management provides for federal income taxes based on
amounts it believes it ultimately will owe. Inherent in the provision for federal income taxes are estimates regarding the deductibility of certain items and the realization of certain tax credits. In the event the ultimate deductibility of certain
items or the realization of certain tax credits differs from estimates, management may be required to significantly change the provision for federal income taxes recorded in the consolidated financial statements. Any such change could significantly
affect the amounts reported in the consolidated statements of income.



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Management has established tax reservesin accordance with the requirements of
FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN 48). See Note 3 to the audited consolidated financial statements included in
the F pages of this report for a summary of FIN 48. These reserves are reviewed regularly and are adjusted as events occur that management believes impact its liability for additional taxes, such as lapsing of applicable statutes of limitations;
conclusion of tax audits or substantial agreement on the deductibility/nondeductibility of uncertain items; additional exposure based on current calculations; identification of new issues; release of administrative guidance; or rendering of a court
decision affecting a particular tax issue. Management believes its tax reserves reasonably provide for potential assessments that may result from IRS examinations and other tax-related matters for all open tax years.



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Results of Operations



2007
Compared to 2006



The following table
summarizes the Companys consolidated results of operations for the years ended December 31:



|                                                                    |  |      |         |   |      |   |         |        |  |      
|------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ------ |  | -----
|(dollars in millions)                                               |  | 2007 |         |   | 2006 |   |         | Change
|Revenues:                                                           |  |      |         |   |      |   |         |        |  |      
|Policy charges:                                                     |  |      |         |   |      |   |         |        |  |      
|Asset fees                                                          |  | $    | 773.2   |   |      | $ | 691.2   |        |  | 12%  
|Cost of insurance charges                                           |  |      | 420.5   |   |      |   | 402.0   |        |  | 5%   
|Administrative fees                                                 |  |      | 119.4   |   |      |   | 139.1   |        |  | (14)%
|Surrender fees                                                      |  |      | 70.8    |   |      |   | 83.7    |        |  | (15)%
|                                                                    |  |      |         |   |      |   |         |        |  |      
|Total policy charges                                                |  |      | 1,383.9 |   |      |   | 1,316.0 |        |  | 5%   
|Premiums                                                            |  |      | 432.7   |   |      |   | 441.5   |        |  | (2)% 
|Net investment income                                               |  |      | 2,276.7 |   |      |   | 2,300.2 |        |  | (1)% 
|Net realized investment (losses) gains                              |  |      | (165.2  | ) |      |   | 9.1     |        |  | NM   
|Other income                                                        |  |      | 600.8   |   |      |   | 495.7   |        |  | 21%  
|                                                                    |  |      |         |   |      |   |         |        |  |      
|Total revenues                                                      |  |      | 4,528.9 |   |      |   | 4,562.5 |        |  | (1)% 
|                                                                    |  |      |         |   |      |   |         |        |  |      
|Benefits and expenses:                                              |  |      |         |   |      |   |         |        |  |      
|Interest credited to policyholder accounts                          |  |      | 1,342.0 |   |      |   | 1,381.5 |        |  | (3)% 
|Benefits and claims                                                 |  |      | 682.9   |   |      |   | 646.8   |        |  | 6%   
|Policyholder dividends                                              |  |      | 83.1    |   |      |   | 90.7    |        |  | (8)% 
|Amortization of DAC                                                 |  |      | 382.1   |   |      |   | 462.9   |        |  | (17)%
|Amortization of VOBA                                                |  |      | 47.0    |   |      |   | 46.0    |        |  | 2%   
|Interest expense                                                    |  |      | 110.6   |   |      |   | 103.1   |        |  | 7%   
|Debt extinguishment costs                                           |  |      | 10.2    |   |      |   |        |        |  | NM   
|Other operating expenses                                            |  |      | 1,070.6 |   |      |   | 1,032.2 |        |  | 4%   
|                                                                    |  |      |         |   |      |   |         |        |  |      
|Total benefits and expenses                                         |  |      | 3,728.5 |   |      |   | 3,763.2 |        |  | (1)% 
|                                                                    |  |      |         |   |      |   |         |        |  |      
|Income from continuing operations before federal income tax expense |  |      | 800.4   |   |      |   | 799.3   |        |  |     
|Federal income tax expense                                          |  |      | 190.7   |   |      |   | 72.2    |        |  | NM   
|                                                                    |  |      |         |   |      |   |         |        |  |      
|Income from continuing operations                                   |  |      | 609.7   |   |      |   | 727.1   |        |  | (16)%
|Discontinued operations, net of taxes                               |  |      | 23.1    |   |      |   | (3.1    | )      |  | NM   
|Cumulative effect of adoption of accounting principle, net of taxes |  |      | (6.0    | ) |      |   |        |        |  | NM   
|                                                                    |  |      |         |   |      |   |         |        |  |      
|Net income                                                          |  | $    | 626.8   |   |      | $ | 724.0   |        |  | (13)%
|                                                                    |  |      |         |   |      |   |         |        |  |      



The
decrease in net income compared to 2006 was impacted by several events. First, $114.2 million of tax reserves were released into earnings during the second quarter of 2006. Thus, the effective tax rates in 2007 and 2006 are not comparable. Second,
2007 results include the $45.5 million gain on the sale of The 401(k) Company, partially offset by a $23.3 million loss related to TBG Financial (both reported in discontinued operations as described previously). Lastly, the Company recorded higher
income from continuing operations before federal income tax expense largely due to lower amortization of DAC and related adjustments as discussed previously and below, along with higher other income and asset fees. Partially offsetting these factors
were net realized investment losses; higher other operating expenses; lower administrative fees; increased amortization of DAC and annuity benefits related to modifications of features in the Companys L.INC product; and debt extinguishment
costs.



Through June 2006, the Companys
federal income tax returns for tax years 2000-2002 were under IRS examination pursuant to a routine audit. In accordance with its regular practice, management established tax reserves representing its best estimate of additional amounts the Company
could be required to pay if certain



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positions it had taken were challenged and ultimately denied by the IRS with respect to these tax years. These reserves are reviewed regularly and are
adjusted as events occur that management believes impacts the Companys liability for additional taxes, such as lapsing of applicable statutes of limitations; conclusion of tax audits or substantial agreement on the
deductibility/non-deductibility of uncertain items; additional exposure based on current calculations; identification of new issues; release of administrative guidance; or rendering of a court decision affecting a particular tax issue. A significant
component of the Companys tax reserve as of December 31, 2005 was related to the separate account dividends received reduction (DRD).



In July 2006, the Company reached substantial agreement with the IRS on all open issues for tax years 2000-2002, including issues related
to the DRD. Accordingly, the Company revised its estimate of amounts that may be due in connection with certain tax positions, including the DRD, for all open tax years. As a result of the revised estimate, $114.2 million of tax reserves were
released into earnings during the second quarter of 2006.



Lower amortization of DAC primarily was due to the unlocking of DAC during the second quarter of 2007, which lowered amortization of DAC by $235.8 million. In addition, during the second quarter of 2007, the Company
modified the features of its L.inc product within the Individual Investments segment. This modification resulted in a substantial change to the existing contracts and required the Company to extinguish existing DAC and certain other related balances
related to this product, resulting in increased amortization of DAC of $124.0 million and increased annuity benefits of $11.0 million.



Other income increased primarily in the Retirement Plans segment due to higher average assets driven by strong market performance in the
private sector business. The Corporate and Other segment also contributed to the increase with higher revenues from retail broker/dealer operations, partially offset by lower income in the structured products business that resulted from an
unfavorable environment for mortgage loan securitizations.



Asset fees increased primarily due to higher average separate account values driven by favorable market performance in the Individual Investments segment.



The Company recorded net realized investment losses in 2007 compared to net gains in 2006 primarily due to a
$100.1 million increase in impairment charges driven by challenging conditions in the credit markets. In addition, the Company recorded higher losses on living benefit embedded derivatives, net of economic hedging activity, primarily as a result of
increased volatility in market returns. See Part II, Item 7AQuantitative and Qualitative Disclosures About Market RiskEquity Market Risk for a detailed discussion of products with living benefits.



The increase in other operating expenses occurred within the
Corporate and Other and Retirement Plans segments. The Corporate and Other segment was impacted by higher costs at Nationwide Bank, which completed its first year of retail operations, and increased commissions related to higher revenues in the
retail broker/dealer operations. The increase in the Retirement Plans segment was due to higher trail commissions and continued investments in technology and infrastructure.



Lower administrative fees primarily were attributable to the Retirement Plans segment due to an $18.6
million policy adjustment in the second quarter of 2006 related to the surrender of a group fixed annuity contract.



Higher benefits and claims primarily were driven by increased annuity benefits of $12.5 million related to the unlocking of DAC and other
related balances and the aforementioned increase in annuity benefits related to modification of L.inc features of $11.0 million. The remaining increase was due to higher guaranteed benefit expenses related to growth in this business.



On June 4, 2007, NFS redeemed all of its outstanding
8.00% senior notes due March 1, 2027 at a price of $317.4 million. This amount represents aggregate principal of $300.0 million, an $11.2 million premium due as a result of early redemption (3.728% of the principal amount) and $6.2 million of
accrued interest through the redemption date. These senior notes were originally issued in March 1997 and, in accordance with their terms,



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became subject to optional redemption by NFS on or after March 1, 2007. As a result of this transaction, NFS incurred a $10.2 million charge ($6.6
million, net of taxes) during the quarter ended June 30, 2007. This charge includes the redemption premium described above and the accelerated amortization of both unamortized debt issuance costs and the unamortized discount on the original
issuance, partially offset by a deferred gain on previous hedging transactions. These amounts (excluding the redemption premium) otherwise would have been recognized through 2027.



2006 Compared to 2005



The following table summarizes the Companys consolidated results of operations for the years ended December 31:



|                                                                    |  |      |         |   |      |   |         |        |  |      
|------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ------ |  | -----
|(dollars in millions)                                               |  | 2006 |         |   | 2005 |   |         | Change
|Revenues:                                                           |  |      |         |   |      |   |         |        |  |      
|Policy charges:                                                     |  |      |         |   |      |   |         |        |  |      
|Asset fees                                                          |  | $    | 691.2   |   |      | $ | 639.9   |        |  | 8%   
|Cost of insurance charges                                           |  |      | 402.0   |   |      |   | 388.5   |        |  | 3%   
|Administrative fees                                                 |  |      | 139.1   |   |      |   | 114.9   |        |  | 21%  
|Surrender fees                                                      |  |      | 83.7    |   |      |   | 98.2    |        |  | (15)%
|                                                                    |  |      |         |   |      |   |         |        |  |      
|Total policy charges                                                |  |      | 1,316.0 |   |      |   | 1,241.5 |        |  | 6%   
|Premiums                                                            |  |      | 441.5   |   |      |   | 399.9   |        |  | 10%  
|Net investment income                                               |  |      | 2,300.2 |   |      |   | 2,344.1 |        |  | (2)% 
|Net realized investment gains                                       |  |      | 9.1     |   |      |   | 20.8    |        |  | (56)%
|Other income                                                        |  |      | 495.7   |   |      |   | 409.9   |        |  | 21%  
|                                                                    |  |      |         |   |      |   |         |        |  |      
|Total revenues                                                      |  |      | 4,562.5 |   |      |   | 4,416.2 |        |  | 3%   
|                                                                    |  |      |         |   |      |   |         |        |  |      
|Benefits and expenses:                                              |  |      |         |   |      |   |         |        |  |      
|Interest credited to policyholder accounts                          |  |      | 1,381.5 |   |      |   | 1,380.9 |        |  |     
|Benefits and claims                                                 |  |      | 646.8   |   |      |   | 574.9   |        |  | 13%  
|Policyholder dividends                                              |  |      | 90.7    |   |      |   | 107.3   |        |  | (15)%
|Amortization of DAC                                                 |  |      | 462.9   |   |      |   | 480.2   |        |  | (4)% 
|Amortization of VOBA                                                |  |      | 46.0    |   |      |   | 45.0    |        |  | 2%   
|Interest expense                                                    |  |      | 103.1   |   |      |   | 107.6   |        |  | (4)% 
|Debt extinguishment costs                                           |  |      |        |   |      |   | 21.7    |        |  | NM   
|Other operating expenses                                            |  |      | 1,032.2 |   |      |   | 918.2   |        |  | 12%  
|                                                                    |  |      |         |   |      |   |         |        |  |      
|Total benefits and expenses                                         |  |      | 3,763.2 |   |      |   | 3,635.8 |        |  | 4%   
|                                                                    |  |      |         |   |      |   |         |        |  |      
|Income from continuing operations before federal income tax expense |  |      | 799.3   |   |      |   | 780.4   |        |  | 2%   
|Federal income tax expense                                          |  |      | 72.2    |   |      |   | 141.4   |        |  | (49)%
|                                                                    |  |      |         |   |      |   |         |        |  |      
|Income from continuing operations                                   |  |      | 727.1   |   |      |   | 639.0   |        |  | 14%  
|Discontinued operations, net of taxes                               |  |      | (3.1    | ) |      |   | (28.6   | )      |  | NM   
|                                                                    |  |      |         |   |      |   |         |        |  |      
|Net income                                                          |  | $    | 724.0   |   |      | $ | 610.4   |        |  | 19%  
|                                                                    |  |      |         |   |      |   |         |        |  |      



The
increase in net income primarily was driven by a tax benefit of $114.2 million recorded during the second quarter of 2006 as described previously compared to tax benefits and recoverables totaling $48.2 million recorded during the third quarter of
2005 as described below. In addition, the Company recorded higher income from continuing operations before federal income tax expense primarily due to increases in policy charges, other income and premiums. The comparison to the prior year also
benefited from debt extinguishment costs incurred in 2005. Higher other operating expenses and benefits and claims, combined with lower interest spread income, partially offset the overall increase in income from continuing operations before federal
income tax expense.



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During the third quarter of 2006, the Company recorded $8.3 million of net federal income
tax expense adjustments primarily related to differences between the 2005 estimated tax liability and the amounts reported on the Companys 2005 tax returns. During the third quarter of 2005, the Company refined its separate account DRD
estimation process. As a result, the Company identified and recorded additional federal income tax benefits and recoverables in the amount of $42.6 million related to all tax years (2000  2005) that were open at that time. Also in the third
quarter of 2005, the Company recorded $5.6 million of net benefit adjustments primarily related to differences between the 2004 estimated tax liability and the amounts reported on the Companys 2004 tax returns. Because of the impact of this
activity, along with the 2006 reserve release described above, the effective tax rates in 2006 and 2005 are not comparable.



The increase in policy charges was driven by higher asset fees and administrative fees. Asset fees rose due to increases in both the
average asset fee rate charged and average separate account values within the Individual Investments segment. The average variable asset fee rate increased as new business sold with living benefit riders and corresponding higher fee rates influenced
the overall average rate. Administrative fees increased primarily in the Retirement Plans segment due to a policy adjustment related to the surrender of a group fixed annuity contract.



Higher other income primarily was attributable to the Retirement Plans segment due to higher average
variable assets in the private sector NTC business driven by strong market performance.



The increase in premiums was due to higher interest rates relative to a year ago, which created a favorable environment for immediate annuity product sales in the Individual Investments segment.



During the third quarter of 2005, the Company
paid $206.2 million to redeem all of its outstanding 7.10% junior subordinated debentures due October 1, 2028, which in turn caused the redemption by Nationwide Financial Services Capital Trust II of its outstanding 7.10% Trust Preferred
Securities and 7.10% Trust Common Securities. As a result of this transaction, the Company incurred debt extinguishment costs of $21.7 million for accelerated amortization of unamortized debt issuance costs, including a deferred loss on previous
hedging transactions. These amounts otherwise would have been recognized through 2028.



Most of the increase in other operating expenses was attributable to the Retirement Plans segment due to increased trail commissions from higher average variable assets and investments in
technology, sales processes and infrastructure.



Higher benefits and claims primarily occurred within the Individual Investments segment due to increased immediate annuity benefit reserves, which were driven by growth in sales relative to a year ago and an increasing proportion of
business with living benefit features. This increase is consistent with the corresponding increase in immediate annuity premiums and asset fees described above.



Interest spread income decreased primarily within the Individual Investments segment due to a decline in general account assets caused
by fixed annuity net outflows and lower income from mortgage loan prepayments and bond call premiums.



Sales



The Company
regularly monitors and reports a production volume metric titled sales. Sales or similar measures are commonly used in the insurance industry as a measure of the volume of new and renewal business generated in a period.



Sales are not derived from any specific GAAP income statement
accounts or line items and should not be viewed as a substitute for any financial measure determined in accordance with GAAP, including sales as it relates to non-insurance companies. Additionally, the Companys definition of sales may differ
from that used by other companies. As used in the insurance industry, sales, or similarly titled measures, generate customer funds managed and administered, which ultimately drive revenues.



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##### Table of Contents

As calculated and analyzed by management, statutory premiums and deposits on individual
and group annuities and life insurance products calculated in accordance with accounting practices prescribed or permitted by regulatory authorities and deposits on administration-only group retirement plans and the advisory services program are
adjusted as described below to arrive at sales.



Life insurance premiums determined on a GAAP basis are significantly different than statutory premiums and deposits. Life insurance premiums determined on a GAAP basis are recognized as revenue when due, as calculated on an accrual basis in
proportion to the service provided and performance rendered under the contract. In addition, many life insurance and annuity products involve an initial deposit or a series of deposits from customers. These deposits are accounted for as such on a
GAAP basis and therefore are not reflected in the GAAP income statement. On a statutory basis, life insurance premiums collected (cash basis) and deposits received (cash basis) are aggregated and reported as statutory premiums and annuity
consideration revenues.



Sales, as reported by
the Company, are stated net of internal replacements, which management believes provides a more meaningful disclosure of production in a given period. In addition, the Companys definition of sales excludes funding agreements issued under the
Companys MTN program; asset transfers associated with large case BOLI and large case retirement plan acquisitions; and deposits into Nationwide employee and agent benefit plans. Although these products contribute to asset and earnings growth,
their production flows potentially can mask trends in the underlying business and thus do not provide meaningful comparisons and analyses.



Management believes that the presentation of sales as measured for management purposes enhances the understanding of the Companys
business and helps depict longer-term trends that may not be apparent in the results of operations due to differences between the timing of sales and revenue recognition.



The Companys flagship products are marketed under The BEST of AMERICA brand and include individual variable and group
annuities, group private sector retirement plans sold through NTC, and variable life insurance. The BEST of AMERICA products allow customers to choose from investment options managed by premier mutual fund managers. The Company has also developed
private label variable and fixed annuity products in conjunction with other financial services providers that allow those providers to sell products to their own customer bases under their own brand names.



The Company also markets group deferred compensation
retirement plans to employees of state and local governments for use under IRC Section 457. The Company utilizes its endorsement by NACo, USCM and IAFF when marketing IRC Section 457 products.



See Part I, Item 1BusinessOverview
for a description of the Companys sales distribution network.



39



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##### Table of Contents

2007 Compared to 2006



The following table summarizes sales by product and segment for the years ended December 31:



|                                         |  |      |          |      |   |          |  |      
|---------------------------------------- |  | ---- | -------- | ---- | - | -------- |  | -----
|(dollars in millions)                    |  | 2007 |          | 2006 |   | Change  
|Individual Investments                   |  |      |          |      |   |          |  |      
|Individual variable annuities:           |  |      |          |      |   |          |  |      
|The BEST of AMERICA products             |  | $    | 5,169.0  |      | $ | 4,390.9  |  | 18%  
|Private label annuities                  |  |      | 434.6    |      |   | 356.6    |  | 22%  
|NFN and other                            |  |      | 2.8      |      |   | 3.6      |  | (22)%
|                                         |  |      |          |      |   |          |  |      
|Total individual variable annuities      |  |      | 5,606.4  |      |   | 4,751.1  |  | 18%  
|Individual fixed annuities               |  |      | 156.3    |      |   | 186.5    |  | (16)%
|Income products                          |  |      | 216.7    |      |   | 230.7    |  | (6)% 
|Advisory services program                |  |      | 147.2    |      |   | 222.8    |  | (34)%
|                                         |  |      |          |      |   |          |  |      
|Total Individual Investments             |  |      | 6,126.6  |      |   | 5,391.1  |  | 14%  
|                                         |  |      |          |      |   |          |  |      
|Retirement Plans                         |  |      |          |      |   |          |  |      
|Private sector:                          |  |      |          |      |   |          |  |      
|The BEST of AMERICA annuity products     |  |      | 1,064.7  |      |   | 1,230.2  |  | (13)%
|The BEST of AMERICA trust products       |  |      | 5,126.3  |      |   | 4,504.0  |  | 14%  
|NFN products                             |  |      | 149.4    |      |   | 188.2    |  | (21)%
|Other                                    |  |      | 82.7     |      |   | 69.4     |  | 19%  
|                                         |  |      |          |      |   |          |  |      
|Total private sector                     |  |      | 6,423.1  |      |   | 5,991.8  |  | 7%   
|                                         |  |      |          |      |   |          |  |      
|Public sector:                           |  |      |          |      |   |          |  |      
|IRC Section 457 annuities                |  |      | 1,548.5  |      |   | 1,533.3  |  | 1%   
|Administration-only agreements           |  |      | 2,719.6  |      |   | 2,484.9  |  | 9%   
|                                         |  |      |          |      |   |          |  |      
|Total public sector                      |  |      | 4,268.1  |      |   | 4,018.2  |  | 6%   
|                                         |  |      |          |      |   |          |  |      
|Total Retirement Plans                   |  |      | 10,691.2 |      |   | 10,010.0 |  | 7%   
|                                         |  |      |          |      |   |          |  |      
|Individual Protection                    |  |      |          |      |   |          |  |      
|Corporate-owned life insurance           |  |      | 552.7    |      |   | 805.9    |  | (31)%
|Traditional/universal life insurance     |  |      | 554.4    |      |   | 517.1    |  | 7%   
|The BEST of AMERICA variable life series |  |      | 448.9    |      |   | 437.3    |  | 3%   
|NFN variable life products               |  |      | 190.4    |      |   | 201.7    |  | (6)% 
|                                         |  |      |          |      |   |          |  |      
|Total Individual Protection              |  |      | 1,746.4  |      |   | 1,962.0  |  | (11)%
|                                         |  |      |          |      |   |          |  |      
|Total sales                              |  | $    | 18,564.2 |      | $ | 17,363.1 |  | 7%   
|                                         |  |      |          |      |   |          |  |      



See
Part II, Item 7MD&ABusiness Segments for an analysis of sales by product and segment.



40



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##### Table of Contents

The following table summarizes sales by distribution channel for the years ended
December 31:



|                             |  |      |          |      |   |          |  |      
|---------------------------- |  | ---- | -------- | ---- | - | -------- |  | -----
|(dollars in millions)        |  | 2007 |          | 2006 |   | Change  
|Non-affiliated:              |  |      |          |      |   |          |  |      
|Independent broker/dealers   |  | $    | 6,354.7  |      | $ | 5,758.2  |  | 10%  
|Financial institutions       |  |      | 2,501.2  |      |   | 2,295.1  |  | 9%   
|Wirehouse and regional firms |  |      | 2,879.0  |      |   | 2,433.6  |  | 18%  
|Pension plan administrators  |  |      | 507.7    |      |   | 532.8    |  | (5)% 
|Life insurance specialists   |  |      | 329.6    |      |   | 580.6    |  | (43)%
|                             |  |      |          |      |   |          |  |      
|Total non-affiliated sales   |  |      | 12,572.2 |      |   | 11,600.3 |  | 8%   
|                             |  |      |          |      |   |          |  |      
|Affiliated:                  |  |      |          |      |   |          |  |      
|NRS                          |  |      | 4,299.9  |      |   | 4,050.2  |  | 6%   
|Nationwide agents            |  |      | 771.8    |      |   | 787.8    |  | (2)% 
|NFN producers                |  |      | 697.1    |      |   | 698.7    |  |     
|Mullin TBG                   |  |      | 223.2    |      |   | 226.1    |  | (1)% 
|                             |  |      |          |      |   |          |  |      
|Total affiliated sales       |  |      | 5,992.0  |      |   | 5,762.8  |  | 4%   
|                             |  |      |          |      |   |          |  |      
|Total sales                  |  | $    | 18,564.2 |      | $ | 17,363.1 |  | 7%   
|                             |  |      |          |      |   |          |  |      



Total
sales increased primarily due to improved individual variable annuity sales in the Individual Investments segment driven by continued market acceptance of the Companys products with living benefit riders. In addition, higher sales in the
Retirement Plans segment were led by private sector group trust product sales and public sector administration-only agreements, partially offset by lower group annuity sales as the majority of pension business continues to move to trust product
offerings. Lower sales of COLI products in the Individual Protection segment due to the addition of two large COLI cases during 2006 also offset the overall increase.



Higher sales in the independent broker/dealers, wirehouse and regional firms, and financial institutions
channels were driven by variable annuity products, specifically products offering living benefit riders.



The increase in sales through NRS reflects higher Retirement Plans sales as described above.



Sales decreased through the life insurance specialists
channel due to the decline in COLI activity mentioned above.



41



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##### Table of Contents

2006 Compared to 2005



The following table summarizes sales by product and segment for the years ended December 31:



|                                         |  |      |          |      |   |          |  |      
|---------------------------------------- |  | ---- | -------- | ---- | - | -------- |  | -----
|(dollars in millions)                    |  | 2006 |          | 2005 |   | Change  
|Individual Investments                   |  |      |          |      |   |          |  |      
|Individual variable annuities:           |  |      |          |      |   |          |  |      
|The BEST of AMERICA products             |  | $    | 4,390.9  |      | $ | 3,135.5  |  | 40%  
|Private label annuities                  |  |      | 356.6    |      |   | 346.6    |  | 3%   
|NFN and other                            |  |      | 3.6      |      |   | 4.7      |  | (23)%
|                                         |  |      |          |      |   |          |  |      
|Total individual variable annuities      |  |      | 4,751.1  |      |   | 3,486.8  |  | 36%  
|Individual fixed annuities               |  |      | 186.5    |      |   | 194.4    |  | (4)% 
|Income products                          |  |      | 230.7    |      |   | 196.7    |  | 17%  
|Advisory services program                |  |      | 222.8    |      |   | 231.3    |  | (4)% 
|                                         |  |      |          |      |   |          |  |      
|Total Individual Investments             |  |      | 5,391.1  |      |   | 4,109.2  |  | 31%  
|                                         |  |      |          |      |   |          |  |      
|Retirement Plans                         |  |      |          |      |   |          |  |      
|Private sector:                          |  |      |          |      |   |          |  |      
|The BEST of AMERICA annuity products     |  |      | 1,230.2  |      |   | 1,371.1  |  | (10)%
|The BEST of AMERICA trust products       |  |      | 4,504.0  |      |   | 3,974.9  |  | 13%  
|NFN products                             |  |      | 188.2    |      |   | 205.9    |  | (9)% 
|Other                                    |  |      | 69.4     |      |   | 75.8     |  | (8)% 
|                                         |  |      |          |      |   |          |  |      
|Total private sector                     |  |      | 5,991.8  |      |   | 5,627.7  |  | 6%   
|                                         |  |      |          |      |   |          |  |      
|Public sector:                           |  |      |          |      |   |          |  |      
|IRC Section 457 annuities                |  |      | 1,533.3  |      |   | 1,544.8  |  | (1)% 
|Administration-only agreements           |  |      | 2,484.9  |      |   | 2,336.9  |  | 6%   
|                                         |  |      |          |      |   |          |  |      
|Total public sector                      |  |      | 4,018.2  |      |   | 3,881.7  |  | 4%   
|                                         |  |      |          |      |   |          |  |      
|Total Retirement Plans                   |  |      | 10,010.0 |      |   | 9,509.4  |  | 5%   
|                                         |  |      |          |      |   |          |  |      
|Individual Protection                    |  |      |          |      |   |          |  |      
|Corporate-owned life insurance           |  |      | 805.9    |      |   | 657.5    |  | 23%  
|Traditional/universal life insurance     |  |      | 517.1    |      |   | 512.7    |  | 1%   
|The BEST of AMERICA variable life series |  |      | 437.3    |      |   | 426.0    |  | 3%   
|NFN variable life products               |  |      | 201.7    |      |   | 229.0    |  | (12)%
|                                         |  |      |          |      |   |          |  |      
|Total Individual Protection              |  |      | 1,962.0  |      |   | 1,825.2  |  | 7%   
|                                         |  |      |          |      |   |          |  |      
|Total sales                              |  | $    | 17,363.1 |      | $ | 15,443.8 |  | 12%  
|                                         |  |      |          |      |   |          |  |      



See
Part II, Item 7MD&ABusiness Segments for an analysis of sales by product and segment.



42



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##### Table of Contents

The following table summarizes sales by distribution channel for the years ended
December 31:



|                             |  |      |          |      |   |          |  |      
|---------------------------- |  | ---- | -------- | ---- | - | -------- |  | -----
|(dollars in millions)        |  | 2006 |          | 2005 |   | Change  
|Non-affiliated:              |  |      |          |      |   |          |  |      
|Independent broker/dealers   |  | $    | 5,758.2  |      | $ | 5,266.0  |  | 9%   
|Financial institutions       |  |      | 2,295.1  |      |   | 1,808.0  |  | 27%  
|Wirehouse and regional firms |  |      | 2,433.6  |      |   | 1,912.5  |  | 27%  
|Pension plan administrators  |  |      | 532.8    |      |   | 469.0    |  | 14%  
|Life insurance specialists   |  |      | 580.6    |      |   | 382.4    |  | 52%  
|                             |  |      |          |      |   |          |  |      
|Total non-affiliated sales   |  |      | 11,600.3 |      |   | 9,837.9  |  | 18%  
|                             |  |      |          |      |   |          |  |      
|Affiliated:                  |  |      |          |      |   |          |  |      
|NRS                          |  |      | 4,050.2  |      |   | 3,914.7  |  | 3%   
|Nationwide agents            |  |      | 787.8    |      |   | 757.8    |  | 4%   
|NFN producers                |  |      | 698.7    |      |   | 658.0    |  | 6%   
|Mullin TBG                   |  |      | 226.1    |      |   | 275.4    |  | (18)%
|                             |  |      |          |      |   |          |  |      
|Total affiliated sales       |  |      | 5,762.8  |      |   | 5,605.9  |  | 3%   
|                             |  |      |          |      |   |          |  |      
|Total sales                  |  | $    | 17,363.1 |      | $ | 15,443.8 |  | 12%  
|                             |  |      |          |      |   |          |  |      



The
increase in total sales primarily was driven by higher variable annuity sales in the Individual Investments segment as a result of the strong performance of products with living benefit riders. Also contributing to the overall increase were improved
private sector trust product sales in the Retirement Plans segment and higher COLI sales in the Individual Protection segment from the addition of two large cases during 2006.



Higher sales in the independent broker/dealers, financial institutions, and wirehouse and regional firms
channels primarily were due to increased variable annuity sales, specifically products offering living benefit riders.



Sales increased through the life insurance specialists channel due to the COLI impact mentioned above.



43



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##### Table of Contents

Business Segments



Individual
Investments



2007 Compared to 2006



The following table summarizes selected
financial data for the Companys Individual Investments segment for the years ended December 31:



|                                                     |  |      |          |   |      |   |          |        |  |      
|---------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ------ |  | -----
|(dollars in millions)                                |  | 2007 |          |   | 2006 |   |          | Change
|Statements of Income Data                            |  |      |          |   |      |   |          |        |  |      
|Revenues:                                            |  |      |          |   |      |   |          |        |  |      
|Policy charges:                                      |  |      |          |   |      |   |          |        |  |      
|Asset fees                                           |  | $    | 587.6    |   |      | $ | 511.4    |        |  | 15%  
|Administrative fees                                  |  |      | 27.1     |   |      |   | 20.4     |        |  | 33%  
|Surrender fees                                       |  |      | 47.9     |   |      |   | 56.6     |        |  | (15)%
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total policy charges                                 |  |      | 662.6    |   |      |   | 588.4    |        |  | 13%  
|Premiums                                             |  |      | 133.3    |   |      |   | 142.5    |        |  | (6)% 
|Net investment income                                |  |      | 642.9    |   |      |   | 781.1    |        |  | (18)%
|Other income                                         |  |      | 31.0     |   |      |   | 14.6     |        |  | 112% 
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total revenues                                       |  |      | 1,469.8  |   |      |   | 1,526.6  |        |  | (4)% 
|                                                     |  |      |          |   |      |   |          |        |  |      
|Benefits and expenses:                               |  |      |          |   |      |   |          |        |  |      
|Interest credited to policyholder accounts           |  |      | 444.3    |   |      |   | 528.3    |        |  | (16)%
|Benefits and claims                                  |  |      | 233.5    |   |      |   | 202.4    |        |  | 15%  
|Amortization of DAC                                  |  |      | 287.1    |   |      |   | 352.7    |        |  | (19)%
|Amortization of VOBA                                 |  |      | 5.3      |   |      |   | 6.5      |        |  | (18)%
|Other operating expenses                             |  |      | 198.9    |   |      |   | 213.6    |        |  | (7)% 
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total benefits and expenses                          |  |      | 1,169.1  |   |      |   | 1,303.5  |        |  | (10)%
|                                                     |  |      |          |   |      |   |          |        |  |      
|Pre-tax operating earnings                           |  | $    | 300.7    |   |      | $ | 223.1    |        |  | 35%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Other Data                                           |  |      |          |   |      |   |          |        |  |      
|Interest spread margin:                              |  |      |          |   |      |   |          |        |  |      
|Net investment income                                |  |      | 5.69%    |   |      |   | 5.74%    |        |  |      
|Interest credited                                    |  |      | 3.76%    |   |      |   | 3.76%    |        |  |      
|                                                     |  |      |          |   |      |   |          |        |  |      
|Interest spread on average general account values    |  |      | 1.93%    |   |      |   | 1.98%    |        |  |      
|                                                     |  |      |          |   |      |   |          |        |  |      
|Sales:                                               |  |      |          |   |      |   |          |        |  |      
|Individual variable annuities                        |  | $    | 5,606.4  |   |      | $ | 4,751.1  |        |  | 18%  
|Individual fixed annuities                           |  |      | 156.3    |   |      |   | 186.5    |        |  | (16)%
|Income products                                      |  |      | 216.7    |   |      |   | 230.7    |        |  | (6)% 
|Advisory services program                            |  |      | 147.2    |   |      |   | 222.8    |        |  | (34)%
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total sales                                          |  | $    | 6,126.6  |   |      | $ | 5,391.1  |        |  | 14%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Average account values:                              |  |      |          |   |      |   |          |        |  |      
|General account                                      |  | $    | 11,814.2 |   |      | $ | 14,041.3 |        |  | (16)%
|Separate account                                     |  |      | 41,366.0 |   |      |   | 37,223.3 |        |  | 11%  
|Advisory services program                            |  |      | 634.9    |   |      |   | 508.1    |        |  | 25%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total average account values                         |  | $    | 53,815.1 |   |      | $ | 51,772.7 |        |  | 4%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Account values as of year end:                       |  |      |          |   |      |   |          |        |  |      
|Individual variable annuities                        |  | $    | 46,121.5 |   |      | $ | 43,804.8 |        |  | 5%   
|Individual fixed annuities                           |  |      | 4,717.3  |   |      |   | 6,536.1  |        |  | (28)%
|Income products                                      |  |      | 2,101.0  |   |      |   | 2,025.6  |        |  | 4%   
|Advisory services program                            |  |      | 647.2    |   |      |   | 597.1    |        |  | 8%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total account values                                 |  | $    | 53,587.0 |   |      | $ | 52,963.6 |        |  | 1%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Pre-tax operating earnings to average account values |  |      | 0.56     | % |      |   | 0.43     | %      |  |      
|                                                     |  |      |          |   |      |   |          |        |  |      



44



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##### Table of Contents

The increase in pre-tax operating earnings primarily was driven by higher asset fees and
lower amortization of DAC, partially offset by lower interest spread income and higher benefits and claims.



Asset fees are calculated daily and charged as a percentage of separate account values. Higher average separate account values driven by
favorable market performance increased asset fees by $58.8 million. In addition, the average variable asset fee rate increased to 1.42% from 1.37% in the prior year as new business sold with living benefit riders and corresponding higher fee rates
influenced the overall average rate, increasing asset fees by $17.4 million.



Lower amortization of DAC primarily was due to the aforementioned DAC unlocking, which lowered amortization of DAC by $208.9 million. In addition, the Company modified the features of its L.inc product within this
segment during 2007. This modification required the Company to extinguish existing DAC and other balances related to L.inc, resulting in a $124.0 million increase in amortization of DAC and increased annuity benefits of $11.0 million as explained
below.



Interest spread income declined due to
three factors. First, general account assets decreased due to fixed annuity outflows, reducing income by $43.0 million. Second, interest spread margins declined during 2007 to 193 basis points compared to 198 basis points in 2006. Long-duration
higher yielding investments rolling over into lower yielding assets drove the margin compression and accounted for $7.8 million in reduced income. Third, the current year included only $17.6 million of income from mortgage loan prepayments and bond
call premiums compared to $21.0 million in 2006.



Higher benefits and claims primarily were driven by increased annuity benefits of $12.5 million related to the unlocking of DAC and other related balances in 2007 and the aforementioned increase in annuity benefits related to modification
of L.inc features of $11.0 million. The remaining increase was due to higher guaranteed benefit expenses related to growth in this business.



Higher sales in the individual variable annuity business were driven by continued market acceptance of the Companys products with
living benefit riders, especially L.inc, and a more targeted sales process. Sales of products with the L.inc rider increased $867.8 million compared to 2006.



The following table summarizes selected information about the Companys deferred individual fixed annuities, including the fixed
option of variable annuities, as of December 31, 2007:



|                                           |  |              |         |                              |       |   |              |                                       |                              |  |       |              |  |                              |         |  |              |   |                              |   |         |  |      |  
|------------------------------------------ |  | ------------ | ------- | ---------------------------- | ----- | - | ------------ | ------------------------------------- | ---------------------------- |  | ----- | ------------ |  | ---------------------------- | ------- |  | ------------ | - | ---------------------------- | - | ------- |  | ---- | -
|                                           |  | Ratchet      |         |                              | Reset |   |              | Market valueadjustment (MVA)and other |                              |  | Total |             
|(dollars in millions)                      |  | Accountvalue |         | Weightedaveragecreditingrate |       |   | Accountvalue |                                       | Weightedaveragecreditingrate |  |       | Accountvalue |  | Weightedaveragecreditingrate |         |  | Accountvalue |   | Weightedaveragecreditingrate |  
|Minimum interest rate of3.50% or greater   |  | $            |        |                              | N/A   |   |              | $                                     | 1,032.8                      |  | 3.88  | %            |  | $                            |        |  | N/A          |   |                              | $ | 1,032.8 |  | 3.88 | %
|Minimum interest rate of3.00% to 3.49%     |  |              | 1,289.3 |                              | 4.12  | % |              |                                       | 3,375.2                      |  | 3.12  | %            |  |                              |        |  | N/A          |   |                              |   | 4,664.5 |  | 3.40 | %
|Minimum interest ratelower than 3.00%      |  |              | 804.1   |                              | 3.38  | % |              |                                       | 433.5                        |  | 3.66  | %            |  |                              | 149.0   |  | 2.55         | % |                              |   | 1,386.6 |  | 3.38 | %
|MVA with no minimuminterest rate guarantee |  |              |        |                              | N/A   |   |              |                                       |                             |  | N/A   |              |  |                              | 1,512.5 |  | 2.73         | % |                              |   | 1,512.5 |  | 2.73 | %
|                                           |  |              |         |                              |       |   |              |                                       |                              |  |       |              |  |                              |         |  |              |   |                              |   |         |  |      |  
|Total deferred individual fixed annuities  |  | $            | 2,093.4 |                              | 3.84  | % |              | $                                     | 4,841.5                      |  | 3.33  | %            |  | $                            | 1,661.5 |  | 2.72         | % |                              | $ | 8,596.4 |  | 3.33 | %
|                                           |  |              |         |                              |       |   |              |                                       |                              |  |       |              |  |                              |         |  |              |   |                              |   |         |  |      |  



45



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##### Table of Contents

2006 Compared to 2005



The following table summarizes selected financial data for
the Companys Individual Investments segment for the years ended December 31:



|                                                     |  |      |          |   |      |   |          |        |  |      
|---------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ------ |  | -----
|(dollars in millions)                                |  | 2006 |          |   | 2005 |   |          | Change
|Statements of Income Data                            |  |      |          |   |      |   |          |        |  |      
|Revenues:                                            |  |      |          |   |      |   |          |        |  |      
|Policy charges:                                      |  |      |          |   |      |   |          |        |  |      
|Asset fees                                           |  | $    | 511.4    |   |      | $ | 461.9    |        |  | 11%  
|Administrative fees                                  |  |      | 20.4     |   |      |   | 16.2     |        |  | 26%  
|Surrender fees                                       |  |      | 56.6     |   |      |   | 62.1     |        |  | (9)% 
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total policy charges                                 |  |      | 588.4    |   |      |   | 540.2    |        |  | 9%   
|Premiums                                             |  |      | 142.5    |   |      |   | 102.9    |        |  | 38%  
|Net investment income                                |  |      | 781.1    |   |      |   | 869.9    |        |  | (10)%
|Other income                                         |  |      | 14.6     |   |      |   | 15.2     |        |  | (4)% 
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total revenues                                       |  |      | 1,526.6  |   |      |   | 1,528.2  |        |  |     
|                                                     |  |      |          |   |      |   |          |        |  |      
|Benefits and expenses:                               |  |      |          |   |      |   |          |        |  |      
|Interest credited to policyholder accounts           |  |      | 528.3    |   |      |   | 589.1    |        |  | (10)%
|Benefits and claims                                  |  |      | 202.4    |   |      |   | 155.4    |        |  | 30%  
|Amortization of DAC                                  |  |      | 352.7    |   |      |   | 329.3    |        |  | 7%   
|Amortization of VOBA                                 |  |      | 6.5      |   |      |   | 7.2      |        |  | (10)%
|Other operating expenses                             |  |      | 213.6    |   |      |   | 196.5    |        |  | 9%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total benefits and expenses                          |  |      | 1,303.5  |   |      |   | 1,277.5  |        |  | 2%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Pre-tax operating earnings                           |  | $    | 223.1    |   |      | $ | 250.7    |        |  | (11)%
|                                                     |  |      |          |   |      |   |          |        |  |      
|Other Data                                           |  |      |          |   |      |   |          |        |  |      
|Interest spread margin:                              |  |      |          |   |      |   |          |        |  |      
|Net investment income                                |  |      | 5.74%    |   |      |   | 5.61%    |        |  |      
|Interest credited                                    |  |      | 3.76%    |   |      |   | 3.69%    |        |  |      
|                                                     |  |      |          |   |      |   |          |        |  |      
|Interest spread on average general account values    |  |      | 1.98%    |   |      |   | 1.92%    |        |  |      
|                                                     |  |      |          |   |      |   |          |        |  |      
|Sales:                                               |  |      |          |   |      |   |          |        |  |      
|Individual variable annuities                        |  | $    | 4,751.1  |   |      | $ | 3,486.8  |        |  | 36%  
|Individual fixed annuities                           |  |      | 186.5    |   |      |   | 194.4    |        |  | (4)% 
|Income products                                      |  |      | 230.7    |   |      |   | 196.7    |        |  | 17%  
|Advisory services program                            |  |      | 222.8    |   |      |   | 231.3    |        |  | (4)% 
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total sales                                          |  | $    | 5,391.1  |   |      | $ | 4,109.2  |        |  | 31%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Average account values:                              |  |      |          |   |      |   |          |        |  |      
|General account                                      |  | $    | 14,041.3 |   |      | $ | 15,966.7 |        |  | (12)%
|Separate account                                     |  |      | 37,223.3 |   |      |   | 35,600.5 |        |  | 5%   
|Advisory services program                            |  |      | 508.1    |   |      |   | 309.3    |        |  | 64%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total average account values                         |  | $    | 51,772.7 |   |      | $ | 51,876.5 |        |  |     
|                                                     |  |      |          |   |      |   |          |        |  |      
|Account values as of year end:                       |  |      |          |   |      |   |          |        |  |      
|Individual variable annuities                        |  | $    | 43,804.8 |   |      | $ | 40,796.0 |        |  | 7%   
|Individual fixed annuities                           |  |      | 6,536.1  |   |      |   | 8,041.8  |        |  | (19)%
|Income products                                      |  |      | 2,025.6  |   |      |   | 1,978.3  |        |  | 2%   
|Advisory services program                            |  |      | 597.1    |   |      |   | 411.5    |        |  | 45%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total account values                                 |  | $    | 52,963.6 |   |      | $ | 51,227.6 |        |  | 3%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Pre-tax operating earnings to average account values |  |      | 0.43     | % |      |   | 0.48     | %      |  |      
|                                                     |  |      |          |   |      |   |          |        |  |      



46



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##### Table of Contents

The decrease in pre-tax operating earnings was driven by higher benefits and claims,
lower interest spread income, increased amortization of DAC and higher other operating expenses. Increased asset fees and premiums partially offset the overall decrease.



The increase in benefits and claims was driven by increased immediate annuity reserves due to growth in sales relative to a
year ago and an increasing proportion of business with living benefit features. This increase is consistent with the increase in premiums on income products noted below.



Interest spread margins widened during 2006 to 198 basis points compared to 192 basis points in 2005. Lower general account
assets caused by fixed annuity net outflows drove $16.0 million of the total reduction in interest spread income. Included in 2006 were 15 basis points, or $21.0 million, of income from mortgage loan prepayments and bond call premiums compared to 20
basis points, or $33.0 million, in 2005



Amortization of DAC increased primarily due to higher variable annuity gross profits driven by higher asset levels. Higher gross profits accounted for $20.8 million of the increase compared to 2005.



Other operating expenses increased primarily due to higher
sales incentives and employee compensation and benefits. In addition, in 2006 the Company began expensing at fair value the costs resulting from share-based payment transactions, resulting in $3.7 million in expense for this segment.



Asset fees rose due to both a higher average asset fee rate
charged and higher average separate account values, representing approximately $28 million and $22 million, respectively, of the overall increase. The average variable asset fee rate increased to 1.37% from 1.30% in the prior year as new business
sold with living benefit riders and corresponding higher fee rates influenced the overall average rate.



The increase in premiums was due to higher interest rates relative to a year ago, which created a favorable environment for immediate
annuity product sales. The Federal Funds rate was 5.25% at December 31, 2006 compared to 4.25% at December 31, 2005.



Higher sales occurred in the variable annuity business driven by the L.inc and CPPLI product riders and a more targeted sales process.
Sales of products with the L.inc and CPPLI riders accounted for $886.3 million and $451.9 million, respectively, of the increase in sales compared to 2005.



The following table summarizes selected information about the Companys deferred individual fixed annuities, including the fixed
option of variable annuities, as of December 31, 2006:



|                                            |  |              |         |                              |       |                                       |   |                              |  |              |  |                              |         |              |       |                              |   |          |  |      
|------------------------------------------- |  | ------------ | ------- | ---------------------------- | ----- | ------------------------------------- | - | ---------------------------- |  | ------------ |  | ---------------------------- | ------- | ------------ | ----- | ---------------------------- | - | -------- |  | -----
|                                            |  | Ratchet      |         | Reset                        |       | Market valueadjustment (MVA)and other |   | Total                       
|(dollars in millions)                       |  | Accountvalue |         | Weightedaveragecreditingrate |       | Accountvalue                          |   | Weightedaveragecreditingrate |  | Accountvalue |  | Weightedaveragecreditingrate |         | Accountvalue |       | Weightedaveragecreditingrate
|Minimum interest rate of 3.50% or greater   |  | $            |        |                              | N/A   |                                       | $ | 1,027.5                      |  | 4.28%        |  | $                            |        |              | N/A   |                              | $ | 1,027.5  |  | 4.28%
|Minimum interest rate of 3.00% to 3.49%     |  |              | 2,130.2 |                              | 4.59% |                                       |   | 4,720.4                      |  | 3.13%        |  |                              |        |              | N/A   |                              |   | 6,850.6  |  | 3.58%
|Minimum interest rate lower than 3.00%      |  |              | 848.3   |                              | 3.32% |                                       |   | 615.2                        |  | 3.59%        |  |                              | 38.3    |              | 3.91% |                              |   | 1,501.8  |  | 3.45%
|MVA with no minimum interest rate guarantee |  |              |        |                              | N/A   |                                       |   |                             |  | N/A          |  |                              | 1,586.9 |              | 2.88% |                              |   | 1,586.9  |  | 2.88%
|                                            |  |              |         |                              |       |                                       |   |                              |  |              |  |                              |         |              |       |                              |   |          |  |      
|Total deferred individual fixed annuities   |  | $            | 2,978.5 |                              | 4.23% |                                       | $ | 6,363.1                      |  | 3.36%        |  | $                            | 1,625.2 |              | 2.91% |                              | $ | 10,966.8 |  | 3.53%
|                                            |  |              |         |                              |       |                                       |   |                              |  |              |  |                              |         |              |       |                              |   |          |  |      



47



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##### Table of Contents

Retirement Plans



2007 Compared to 2006



The following table summarizes selected financial data for the Companys Retirement Plans segment for the years ended
December 31:



|                                                     |  |      |          |   |      |   |          |        |  |      
|---------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ------ |  | -----
|(dollars in millions)                                |  | 2007 |          |   | 2006 |   |          | Change
|Statements of Income Data                            |  |      |          |   |      |   |          |        |  |      
|Revenues:                                            |  |      |          |   |      |   |          |        |  |      
|Policy charges:                                      |  |      |          |   |      |   |          |        |  |      
|Asset fees                                           |  | $    | 132.5    |   |      | $ | 134.0    |        |  | (1)% 
|Administrative fees                                  |  |      | 11.8     |   |      |   | 36.0     |        |  | (67)%
|Surrender fees                                       |  |      | 3.0      |   |      |   | 4.5      |        |  | (32)%
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total policy charges                                 |  |      | 147.3    |   |      |   | 174.5    |        |  | (16)%
|Net investment income                                |  |      | 655.2    |   |      |   | 652.2    |        |  |     
|Other income                                         |  |      | 343.7    |   |      |   | 288.9    |        |  | 19%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total revenues                                       |  |      | 1,146.2  |   |      |   | 1,115.6  |        |  | 3%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Benefits and expenses:                               |  |      |          |   |      |   |          |        |  |      
|Interest credited to policyholder accounts           |  |      | 443.3    |   |      |   | 451.6    |        |  | (2)% 
|Amortization of DAC                                  |  |      | 27.4     |   |      |   | 38.3     |        |  | (29)%
|Amortization of VOBA                                 |  |      | 2.2      |   |      |   | 6.9      |        |  | (68)%
|Other operating expenses                             |  |      | 420.7    |   |      |   | 397.6    |        |  | 6%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total benefits and expenses                          |  |      | 893.6    |   |      |   | 894.4    |        |  |     
|                                                     |  |      |          |   |      |   |          |        |  |      
|Pre-tax operating earnings                           |  | $    | 252.6    |   |      | $ | 221.2    |        |  | 14%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Other Data                                           |  |      |          |   |      |   |          |        |  |      
|Interest spread margin:                              |  |      |          |   |      |   |          |        |  |      
|Net investment income                                |  |      | 5.88%    |   |      |   | 5.88%    |        |  |      
|Interest credited                                    |  |      | 3.98%    |   |      |   | 4.07%    |        |  |      
|                                                     |  |      |          |   |      |   |          |        |  |      
|Interest spread on average general account values    |  |      | 1.90%    |   |      |   | 1.81%    |        |  |      
|                                                     |  |      |          |   |      |   |          |        |  |      
|Sales:                                               |  |      |          |   |      |   |          |        |  |      
|Private sector                                       |  | $    | 6,423.1  |   |      | $ | 5,991.8  |        |  | 7%   
|Public sector                                        |  |      | 4,268.1  |   |      |   | 4,018.2  |        |  | 6%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total sales                                          |  | $    | 10,691.2 |   |      | $ | 10,010.0 |        |  | 7%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Average account values:                              |  |      |          |   |      |   |          |        |  |      
|General account                                      |  | $    | 11,135.3 |   |      | $ | 11,093.0 |        |  |     
|Separate account                                     |  |      | 17,723.6 |   |      |   | 18,512.4 |        |  | (4)% 
|Non-insurance assets                                 |  |      | 20,747.9 |   |      |   | 16,515.0 |        |  | 26%  
|Administration-only                                  |  |      | 29,844.5 |   |      |   | 25,904.7 |        |  | 15%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total average account values                         |  | $    | 79,451.3 |   |      | $ | 72,025.1 |        |  | 10%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Account values as of year end:                       |  |      |          |   |      |   |          |        |  |      
|Private sector                                       |  | $    | 32,286.5 |   |      | $ | 32,645.3 |        |  | (1)% 
|Public sector                                        |  |      | 48,260.1 |   |      |   | 43,951.8 |        |  | 10%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total account values                                 |  | $    | 80,546.6 |   |      | $ | 76,597.1 |        |  | 5%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Pre-tax operating earnings to average account values |  |      | 0.32     | % |      |   | 0.31     | %      |  |      
|                                                     |  |      |          |   |      |   |          |        |  |      



48



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##### Table of Contents

The increase in pre-tax operating earnings primarily was driven by higher other income
and interest spread income and lower amortization of DAC, partially offset by lower administrative fees and higher other operating expenses.



The increase in other income, which includes administrative fees from non-insurance retirement and deferred compensation plans and
asset-based fees from the NTC 401(k) platform, primarily was driven by higher other asset fees and mutual fund revenue of $35.2 million and $20.3 million, respectively, resulting from higher average variable assets.



Interest spread income increased due to a lower average
crediting rate as interest spread margins widened to 190 basis points in 2007 compared to 181 basis points for 2006. Included in 2007 were 11 basis points, or $11.7 million, of income from mortgage loan prepayments and bond call premiums compared to
9 basis points, or $9.9 million, in 2006.



Lower amortization of DAC primarily was due to the aforementioned DAC unlocking of the net separate account growth rate assumption for the three-year period and adjusting the net separate account growth rate and related discount rate
assumptions. These factors lowered amortization of DAC by $10.5 million.



Lower administrative fees were attributable to the surrender of a group annuity contract during 2006, which resulted in an $18.6 million policy adjustment. In addition, the surrender of a group retirement plan in 2006
resulted in the recognition of $5.1 million of previously deferred revenue and $3.5 million of related VOBA amortization.



The increase in other operating expenses reflects higher general operating expenses due to investments in technology and infrastructure
and expected increases in support, development and amortization of a new administrative platform placed into service during 2006. In addition, trail commissions increased $22.0 million from higher average assets and asset-based variable expenses.
Trail commissions represent compensation paid to the Companys producing firms based on the level of assets under management rather than new deposits made in a given time period. Instead of paying a one-time amount at the point of sale, a
smaller payment is made each period that the business remains in force. In some cases, a combination of both types of compensation is paid.



Public sector sales increased due to growth in administration-only agreements.



49



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##### Table of Contents

2006 Compared to 2005



The following table summarizes selected financial data for
the Companys Retirement Plans segment for the years ended December 31:



|                                                     |  |      |          |   |      |   |          |        |  |      
|---------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ------ |  | -----
|(dollars in millions)                                |  | 2006 |          |   | 2005 |   |          | Change
|Statements of Income Data                            |  |      |          |   |      |   |          |        |  |      
|Revenues:                                            |  |      |          |   |      |   |          |        |  |      
|Policy charges:                                      |  |      |          |   |      |   |          |        |  |      
|Asset fees                                           |  | $    | 134.0    |   |      | $ | 137.8    |        |  | (3)% 
|Administrative fees                                  |  |      | 36.0     |   |      |   | 8.7      |        |  | NM   
|Surrender fees                                       |  |      | 4.5      |   |      |   | 8.2      |        |  | (45)%
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total policy charges                                 |  |      | 174.5    |   |      |   | 154.7    |        |  | 13%  
|Net investment income                                |  |      | 652.2    |   |      |   | 661.4    |        |  | (1)% 
|Other income                                         |  |      | 288.9    |   |      |   | 229.1    |        |  | 26%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total revenues                                       |  |      | 1,115.6  |   |      |   | 1,045.2  |        |  | 7%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Benefits and expenses:                               |  |      |          |   |      |   |          |        |  |      
|Interest credited to policyholder accounts           |  |      | 451.6    |   |      |   | 455.0    |        |  | (1)% 
|Amortization of DAC                                  |  |      | 38.3     |   |      |   | 47.4     |        |  | (19)%
|Amortization of VOBA                                 |  |      | 6.9      |   |      |   | 3.5      |        |  | 97%  
|Other operating expenses                             |  |      | 397.6    |   |      |   | 348.0    |        |  | 14%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total benefits and expenses                          |  |      | 894.4    |   |      |   | 853.9    |        |  | 5%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Pre-tax operating earnings                           |  | $    | 221.2    |   |      | $ | 191.3    |        |  | 16%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Other Data                                           |  |      |          |   |      |   |          |        |  |      
|Interest spread margin:                              |  |      |          |   |      |   |          |        |  |      
|Net investment income                                |  |      | 5.88%    |   |      |   | 6.08%    |        |  |      
|Interest credited                                    |  |      | 4.07%    |   |      |   | 4.18%    |        |  |      
|                                                     |  |      |          |   |      |   |          |        |  |      
|Interest spread on average general account values    |  |      | 1.81%    |   |      |   | 1.90%    |        |  |      
|                                                     |  |      |          |   |      |   |          |        |  |      
|Sales:                                               |  |      |          |   |      |   |          |        |  |      
|Private sector                                       |  | $    | 5,991.8  |   |      | $ | 5,627.7  |        |  | 6%   
|Public sector                                        |  |      | 4,018.2  |   |      |   | 3,881.7  |        |  | 4%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total sales                                          |  | $    | 10,010.0 |   |      | $ | 9,509.4  |        |  | 5%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Average account values:                              |  |      |          |   |      |   |          |        |  |      
|General account                                      |  | $    | 11,093.0 |   |      | $ | 10,881.2 |        |  | 2%   
|Separate account                                     |  |      | 18,512.4 |   |      |   | 19,792.0 |        |  | (6)% 
|Non-insurance assets                                 |  |      | 16,515.0 |   |      |   | 12,500.3 |        |  | 32%  
|Administration-only                                  |  |      | 25,904.7 |   |      |   | 24,289.9 |        |  | 7%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total average account values                         |  | $    | 72,025.1 |   |      | $ | 67,463.4 |        |  | 7%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Account values as of year end:                       |  |      |          |   |      |   |          |        |  |      
|Private sector                                       |  | $    | 32,645.3 |   |      | $ | 29,758.8 |        |  | 10%  
|Public sector                                        |  |      | 43,951.8 |   |      |   | 40,092.0 |        |  | 10%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total account values                                 |  | $    | 76,597.1 |   |      | $ | 69,850.8 |        |  | 10%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Pre-tax operating earnings to average account values |  |      | 0.31     | % |      |   | 0.28     | %      |  |      
|                                                     |  |      |          |   |      |   |          |        |  |      



The
increase in pre-tax operating earnings primarily was driven by higher other income and administrative fees and lower amortization of DAC, partially offset by higher other operating expenses.



50



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##### Table of Contents

The increase in other income primarily was driven by higher non-insurance asset fees and
mutual fund reimbursements of $34.3 million and $19.8 million, respectively, resulting from higher average variable assets.



The increase in administrative fees primarily was due to the surrender of a group fixed annuity contract, which resulted in an $18.6
million policy adjustment in the second quarter of 2006. In addition, the surrender of a group retirement plan in the third quarter of 2006 resulted in the recognition of $5.1 million of previously deferred revenue and $3.5 million of related VOBA
amortization.



Amortization of DAC was lower in
2006 primarily due to unlocking in 2005 related to mutual fund revenue assumptions that resulted in higher amortization expense in 2005 compared to favorable true-ups in 2006.



The increase in other operating expenses reflects higher trail commissions of $18.6 million from increased
average variable assets and higher asset-based variable expenses. In addition, the current year included $7.1 million of amortization related to an internally developed software application that did not exist in the same period a year ago.



Interest spread margins declined to 181 basis
points in 2006 compared to 190 basis points for 2005. Included in 2006 were 9 basis points, or $9.9 million, of income from mortgage loan prepayments and bond call premiums compared to 20 basis points, or $22.1 million, in 2005.



Private sector sales rose due to growth in total plans under
administration and related recurring deposits.



Public sector sales increased due to increased flows from existing cases and higher rates of plan transfers, especially IAFF cases. These increases were partially offset by the loss of premium associated with the group fixed annuity
contract surrender mentioned previously.



51



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##### Table of Contents

Individual Protection



2007 Compared to 2006



The following table summarizes selected financial data for the Companys Individual Protection segment for the years
ended December 31:



|                                           |  |      |           |      |   |           |  |      
|------------------------------------------ |  | ---- | --------- | ---- | - | --------- |  | -----
|(dollars in millions)                      |  | 2007 |           | 2006 |   | Change   
|Statements of Income Data                  |  |      |           |      |   |           |  |      
|Revenues:                                  |  |      |           |      |   |           |  |      
|Policy charges:                            |  |      |           |      |   |           |  |      
|Asset fees                                 |  | $    | 53.1      |      | $ | 45.8      |  | 16%  
|Cost of insurance charges                  |  |      | 420.5     |      |   | 402.0     |  | 5%   
|Administrative fees                        |  |      | 80.5      |      |   | 82.7      |  | (3)% 
|Surrender fees                             |  |      | 19.9      |      |   | 22.6      |  | (12)%
|                                           |  |      |           |      |   |           |  |      
|Total policy charges                       |  |      | 574.0     |      |   | 553.1     |  | 4%   
|Premiums                                   |  |      | 299.4     |      |   | 299.0     |  |     
|Net investment income                      |  |      | 472.3     |      |   | 468.1     |  | 1%   
|Other income                               |  |      | 4.0       |      |   | 0.8       |  | NM   
|                                           |  |      |           |      |   |           |  |      
|Total revenues                             |  |      | 1,349.7   |      |   | 1,321.0   |  | 2%   
|                                           |  |      |           |      |   |           |  |      
|Benefits and expenses:                     |  |      |           |      |   |           |  |      
|Interest credited to policyholder accounts |  |      | 192.0     |      |   | 191.7     |  |     
|Benefits                                   |  |      | 449.4     |      |   | 444.4     |  | 1%   
|Policyholder dividends                     |  |      | 83.1      |      |   | 90.7      |  | (8)% 
|Amortization of DAC                        |  |      | 93.1      |      |   | 81.6      |  | 14%  
|Amortization of VOBA                       |  |      | 39.3      |      |   | 32.6      |  | 20%  
|Other operating expenses                   |  |      | 193.0     |      |   | 199.2     |  | (3)% 
|                                           |  |      |           |      |   |           |  |      
|Total benefits and expenses                |  |      | 1,049.9   |      |   | 1,040.2   |  | 1%   
|                                           |  |      |           |      |   |           |  |      
|Pre-tax operating earnings                 |  | $    | 299.8     |      | $ | 280.8     |  | 7%   
|                                           |  |      |           |      |   |           |  |      
|Other Data                                 |  |      |           |      |   |           |  |      
|Sales:                                     |  |      |           |      |   |           |  |      
|Corporate-owned life insurance             |  | $    | 552.7     |      | $ | 805.9     |  | (31)%
|Traditional/universal life insurance       |  |      | 554.4     |      |   | 517.1     |  | 7%   
|The BEST of AMERICA variable life series   |  |      | 448.9     |      |   | 437.3     |  | 3%   
|NFN variable life products                 |  |      | 190.4     |      |   | 201.7     |  | (6)% 
|                                           |  |      |           |      |   |           |  |      
|Total sales                                |  | $    | 1,746.4   |      | $ | 1,962.0   |  | (11)%
|                                           |  |      |           |      |   |           |  |      
|Policy reserves as of year end:            |  |      |           |      |   |           |  |      
|Individual investment life insurance       |  | $    | 6,298.2   |      | $ | 5,842.5   |  | 8%   
|Corporate investment life insurance        |  |      | 9,278.8   |      |   | 8,514.4   |  | 9%   
|Traditional life insurance                 |  |      | 4,156.4   |      |   | 4,170.9   |  |     
|Universal life insurance                   |  |      | 1,257.1   |      |   | 1,159.0   |  | 8%   
|                                           |  |      |           |      |   |           |  |      
|Total policy reserves                      |  | $    | 20,990.5  |      | $ | 19,686.8  |  | 7%   
|                                           |  |      |           |      |   |           |  |      
|Insurance in force as of year end:         |  |      |           |      |   |           |  |      
|Individual investment life insurance       |  | $    | 57,772.0  |      | $ | 57,536.7  |  |     
|Corporate investment life insurance        |  |      | 25,291.5  |      |   | 24,764.4  |  | 2%   
|Traditional life insurance                 |  |      | 43,970.7  |      |   | 41,061.3  |  | 7%   
|Universal life insurance                   |  |      | 10,484.5  |      |   | 9,950.3   |  | 5%   
|                                           |  |      |           |      |   |           |  |      
|Total insurance in force                   |  | $    | 137,518.7 |      | $ | 133,312.7 |  | 3%   
|                                           |  |      |           |      |   |           |  |      



52



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##### Table of Contents

The increase in pre-tax operating earnings primarily was due to higher policy charges and
lower policyholder dividends. Higher amortization of DAC partially offset the overall increase.



Policy charges increased due to higher cost of insurance charges and asset fees. The aging of the individual life business block drove higher cost of insurance charges. The aging of a block
generally increases cost of insurance charges as the Companys related mortality risk also rises. Asset fees increased due to higher average separate account values.



Policyholder dividends have trended downward since the dividend scale was reduced in 2006. Furthermore, since participating
policies are no longer sold, lapses decrease the number of policies on which dividends are paid.



Amortization of DAC increased primarily due to unlocking in 2006 related to mortality assumptions in fixed universal life and variable universal life that reduced amortization by $18.5 and $10.9
million, respectively. This increase was offset by lower amortization of DAC due to the aforementioned DAC unlocking in 2007 of the net separate account growth rate assumption for the three-year reversion period, adjusting the net separate account
growth rate and related discount rate assumptions, and increasing estimated lapse rates for BOLI products. These factors lowered amortization of DAC by $18.1 million in 2007.



The decrease in sales primarily was due to the addition of two large COLI cases during 2006.



53



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##### Table of Contents

2006 Compared to 2005



The following table summarizes selected financial data for
the Companys Individual Protection segment for the years ended December 31:



|                                           |  |      |           |      |   |           |  |      
|------------------------------------------ |  | ---- | --------- | ---- | - | --------- |  | -----
|(dollars in millions)                      |  | 2006 |           | 2005 |   | Change   
|Statements of Income Data                  |  |      |           |      |   |           |  |      
|Revenues:                                  |  |      |           |      |   |           |  |      
|Policy charges:                            |  |      |           |      |   |           |  |      
|Asset fees                                 |  | $    | 45.8      |      | $ | 40.2      |  | 14%  
|Cost of insurance charges                  |  |      | 402.0     |      |   | 388.5     |  | 3%   
|Administrative fees                        |  |      | 82.7      |      |   | 90.0      |  | (8)% 
|Surrender fees                             |  |      | 22.6      |      |   | 27.9      |  | (19)%
|                                           |  |      |           |      |   |           |  |      
|Total policy charges                       |  |      | 553.1     |      |   | 546.6     |  | 1%   
|Premiums                                   |  |      | 299.0     |      |   | 297.0     |  | 1%   
|Net investment income                      |  |      | 468.1     |      |   | 475.1     |  | (1)% 
|Other income                               |  |      | 0.8       |      |   | 2.4       |  | (67)%
|                                           |  |      |           |      |   |           |  |      
|Total revenues                             |  |      | 1,321.0   |      |   | 1,321.1   |  |     
|                                           |  |      |           |      |   |           |  |      
|Benefits and expenses:                     |  |      |           |      |   |           |  |      
|Interest credited to policyholder accounts |  |      | 191.7     |      |   | 190.7     |  | 1%   
|Benefits                                   |  |      | 444.4     |      |   | 419.5     |  | 6%   
|Policyholder dividends                     |  |      | 90.7      |      |   | 107.3     |  | (15)%
|Amortization of DAC                        |  |      | 81.6      |      |   | 102.7     |  | (21)%
|Amortization of VOBA                       |  |      | 32.6      |      |   | 34.3      |  | (5)% 
|Other operating expenses                   |  |      | 199.2     |      |   | 200.5     |  | (1)% 
|                                           |  |      |           |      |   |           |  |      
|Total benefits and expenses                |  |      | 1,040.2   |      |   | 1,055.0   |  | (1)% 
|                                           |  |      |           |      |   |           |  |      
|Pre-tax operating earnings                 |  | $    | 280.8     |      | $ | 266.1     |  | 6%   
|                                           |  |      |           |      |   |           |  |      
|Other Data                                 |  |      |           |      |   |           |  |      
|Sales:                                     |  |      |           |      |   |           |  |      
|Corporate-owned life insurance             |  | $    | 805.9     |      | $ | 657.5     |  | 23%  
|Traditional/universal life insurance       |  |      | 517.1     |      |   | 512.7     |  | 1%   
|The BEST of AMERICA variable life series   |  |      | 437.3     |      |   | 426.0     |  | 3%   
|NFN variable life products                 |  |      | 201.7     |      |   | 229.0     |  | (12)%
|                                           |  |      |           |      |   |           |  |      
|Total sales                                |  | $    | 1,962.0   |      | $ | 1,825.2   |  | 7%   
|                                           |  |      |           |      |   |           |  |      
|Policy reserves as of year end:            |  |      |           |      |   |           |  |      
|Individual investment life insurance       |  | $    | 5,842.5   |      | $ | 5,329.5   |  | 10%  
|Corporate investment life insurance        |  |      | 8,514.4   |      |   | 6,744.6   |  | 26%  
|Traditional life insurance                 |  |      | 4,170.9   |      |   | 4,225.2   |  | (1)% 
|Universal life insurance                   |  |      | 1,159.0   |      |   | 1,089.3   |  | 6%   
|                                           |  |      |           |      |   |           |  |      
|Total policy reserves                      |  | $    | 19,686.8  |      | $ | 17,388.6  |  | 13%  
|                                           |  |      |           |      |   |           |  |      
|Insurance in force as of year end:         |  |      |           |      |   |           |  |      
|Individual investment life insurance       |  | $    | 57,536.7  |      | $ | 57,021.7  |  | 1%   
|Corporate investment life insurance        |  |      | 24,764.4  |      |   | 23,635.5  |  | 5%   
|Traditional life insurance                 |  |      | 41,061.3  |      |   | 36,589.3  |  | 12%  
|Universal life insurance                   |  |      | 9,950.3   |      |   | 9,114.6   |  | 9%   
|                                           |  |      |           |      |   |           |  |      
|Total insurance in force                   |  | $    | 133,312.7 |      | $ | 126,361.1 |  | 6%   
|                                           |  |      |           |      |   |           |  |      



54



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##### Table of Contents

The increase in pre-tax operating earnings primarily was driven by decreased amortization
of DAC, lower policyholder dividends and increased cost of insurance charges. Higher benefits, lower net investment income and lower administrative fees partially offset the overall increase.



Amortization of DAC declined primarily due to unlocking in
2006 related to mortality assumptions in fixed universal life and variable universal life that reduced amortization by $18.5 and $10.9 million, respectively.



Higher cost of insurance charges were due to increased business in force combined with the aging of the individual life business block.
The aging of a block generally increases cost of insurance charges.



Higher benefits were due to adverse mortality in both the fixed and investment life businesses, partially offset by a $3.3 million waiver of premium reserve release in fixed life during the first quarter of 2006. The
overall increase in total policyholder benefits was partially offset by lower policyholder dividends, primarily driven by a lower current dividend scale.



Despite the slight growth in fixed account assets, net investment income declined primarily due to a $7.0 million decrease in income from
mortgage loan prepayments and bond call premiums compared to the prior year.



Administrative fees decreased primarily due to a change in business mix in the current year.



The increase in sales primarily was due to the addition of two large COLI cases during 2006.



55



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##### Table of Contents

Corporate and Other



2007 Compared to 2006



The following table summarizes selected financial data for the Companys Corporate and Other segment for the years ended
December 31:



|                                                                                    |  |      |         |   |      |   |         |        |  |      
|----------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ------ |  | -----
|(dollars in millions)                                                               |  | 2007 |         |   | 2006 |   |         | Change
|Statements of Income Data                                                           |  |      |         |   |      |   |         |        |  |      
|Operating revenues:                                                                 |  |      |         |   |      |   |         |        |  |      
|Net investment income                                                               |  | $    | 506.3   |   |      | $ | 398.8   |        |  | 27%  
|Other income                                                                        |  |      | 209.7   |   |      |   | 201.1   |        |  | 4%   
|                                                                                    |  |      |         |   |      |   |         |        |  |      
|Total operating revenues                                                            |  |      | 716.0   |   |      |   | 599.9   |        |  | 19%  
|                                                                                    |  |      |         |   |      |   |         |        |  |      
|Benefits and operating expenses:                                                    |  |      |         |   |      |   |         |        |  |      
|Interest credited to policyholder accounts                                          |  |      | 262.4   |   |      |   | 209.9   |        |  | 25%  
|Interest expense                                                                    |  |      | 110.6   |   |      |   | 103.1   |        |  | 7%   
|Debt extinguishment costs                                                           |  |      | 10.2    |   |      |   |        |        |  | NM   
|Other operating expenses                                                            |  |      | 258.2   |   |      |   | 221.8   |        |  | 16%  
|                                                                                    |  |      |         |   |      |   |         |        |  |      
|Total benefits and operating expenses                                               |  |      | 641.4   |   |      |   | 534.8   |        |  | 20%  
|                                                                                    |  |      |         |   |      |   |         |        |  |      
|Pre-tax operating earnings                                                          |  |      | 74.6    |   |      |   | 65.1    |        |  | 15%  
|Add: non-operating net realized investment losses1                                  |  |      | (152.8  | ) |      |   | (0.6    | )      |  | NM   
|Add: adjustment to amortization related to net realized investment gains and losses |  |      | 25.5    |   |      |   | 9.7     |        |  | NM   
|                                                                                    |  |      |         |   |      |   |         |        |  |      
|Income (loss) from continuing operations before federal income tax expense          |  | $    | (52.7   | ) |      | $ | 74.2    |        |  | NM   
|                                                                                    |  |      |         |   |      |   |         |        |  |      
|Other Data                                                                          |  |      |         |   |      |   |         |        |  |      
|Account values as of year end                                                      |  |      |         |   |      |   |         |        |  |      
|Funding agreements backing medium-term notes                                        |  | $    | 4,525.7 |   |      | $ | 4,599.5 |        |  | (2)% 
|Nationwide Bank                                                                     |  |      | 798.3   |   |      |   | 222.3   |        |  | NM   
|NFG                                                                                 |  |      | 1,917.3 |   |      |   | 2,840.6 |        |  | (33)%
|                                                                                    |  |      |         |   |      |   |         |        |  |      
|Total account values                                                                |  | $    | 7,241.3 |   |      | $ | 7,662.4 |        |  | (5)% 
|                                                                                    |  |      |         |   |      |   |         |        |  |      



|1 | Excluding operating items (periodic net amounts paid or received on interest rate swaps that do not qualify for hedge
accounting treatment, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations).
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The increase in pre-tax operating earnings primarily was attributable to higher interest spread income and
other income, partially offset by higher other operating expenses and the aforementioned debt extinguishment costs.



Interest spread income increased primarily due to the $30.1 million contribution from Nationwide Bank, which completed its first year of
retail operations. In addition, higher average assets and slightly higher average investment returns contributed to the increase.



Higher other income primarily was due to a $20.0 million increase in revenues from retail broker/dealer operations, partially offset by
lower income in the structured products business driven by an unfavorable environment for mortgage loan securitizations.



Other operating expenses were higher primarily due to a $16.1 million increase at Nationwide Bank and higher commissions related to
increased revenues from retail broker/dealer operations as mentioned above.



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The increase in non-operating net realized investment losses was driven by higher
impairment charges in 2007 due to challenging conditions in the credit markets. In addition, the Company recorded higher losses on living benefit embedded derivatives, net of economic hedging activity, primarily as a result of increased volatility
in market returns.



The following table
summarizes net realized investment (losses) gains from continuing operations by source for the years ended December 31:



|                                                              |  |      |        |   |      |   |       |  
|------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | -
|(in millions)                                                 |  | 2007 |        |   | 2006 |  
|Total realized gains on sales, net of hedging losses          |  | $    | 78.9   |   |      | $ | 98.7  |  
|Total realized losses on sales, net of hedging gains          |  |      | (85.0  | ) |      |   | (75.6 | )
|Total other-than-temporary and other investment impairments   |  |      | (116.9 | ) |      |   | (16.8 | )
|Credit default swaps                                          |  |      | (7.5   | ) |      |   | (1.1  | )
|Periodic net coupon settlements on non-qualifying derivatives |  |      | 1.7    |   |      |   | 1.9   |  
|Other derivatives                                             |  |      | (29.4  | ) |      |   | (0.6  | )
|Trading portfolio valuation loss                              |  |      | (5.7   | ) |      |   |      |  
|                                                              |  |      |        |   |      |   |       |  
|Total realized (losses) gains before adjustments              |  |      | (163.9 | ) |      |   | 6.5   |  
|Amounts credited to policyholder dividend obligation          |  |      | (2.5   | ) |      |   | 0.1   |  
|Other                                                         |  |      | 1.2    |   |      |   | 2.5   |  
|                                                              |  |      |        |   |      |   |       |  
|Net realized investment (losses) gains                        |  | $    | (165.2 | ) |      | $ | 9.1   |  
|                                                              |  |      |        |   |      |   |       |  



The
Company has a comprehensive portfolio monitoring process for fixed maturity and equity securities to identify and evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. See Part
II, Item 7MD&ACritical Accounting Policies and Recently Issued Accounting StandardsImpairment Losses on Investments for a complete discussion of this process.



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2006 Compared to 2005



The following table summarizes selected financial data for
the Companys Corporate and Other segment for the years ended December 31:



|                                                                                    |  |      |         |   |      |   |         |        |  |     
|----------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ------ |  | ----
|(dollars in millions)                                                               |  | 2006 |         |   | 2005 |   |         | Change
|Statements of Income Data                                                           |  |      |         |   |      |   |         |        |  |     
|Operating revenues:                                                                 |  |      |         |   |      |   |         |        |  |     
|Net investment income                                                               |  | $    | 398.8   |   |      | $ | 337.7   |        |  | 18% 
|Other income                                                                        |  |      | 201.1   |   |      |   | 165.8   |        |  | 21% 
|                                                                                    |  |      |         |   |      |   |         |        |  |     
|Total operating revenues                                                            |  |      | 599.9   |   |      |   | 503.5   |        |  | 19% 
|                                                                                    |  |      |         |   |      |   |         |        |  |     
|Benefits and operating expenses:                                                    |  |      |         |   |      |   |         |        |  |     
|Interest credited to policyholder accounts                                          |  |      | 209.9   |   |      |   | 146.1   |        |  | 44% 
|Interest expense                                                                    |  |      | 103.1   |   |      |   | 107.6   |        |  | (4)%
|Debt extinguishment costs                                                           |  |      |        |   |      |   | 21.7    |        |  | NM  
|Other operating expenses                                                            |  |      | 221.8   |   |      |   | 173.2   |        |  | 28% 
|                                                                                    |  |      |         |   |      |   |         |        |  |     
|Total benefits and operating expenses                                               |  |      | 534.8   |   |      |   | 448.6   |        |  | 19% 
|                                                                                    |  |      |         |   |      |   |         |        |  |     
|Pre-tax operating earnings                                                          |  |      | 65.1    |   |      |   | 54.9    |        |  | 19% 
|Add: non-operating net realized investment (losses) gains1                          |  |      | (0.6    | ) |      |   | 18.2    |        |  | NM  
|Add: adjustment to amortization related to net realized investment gains and losses |  |      | 9.7     |   |      |   | (0.8    | )      |  | NM  
|                                                                                    |  |      |         |   |      |   |         |        |  |     
|Income from continuing operations before federal income tax expense                 |  | $    | 74.2    |   |      | $ | 72.3    |        |  | 3%  
|                                                                                    |  |      |         |   |      |   |         |        |  |     
|Other Data                                                                          |  |      |         |   |      |   |         |        |  |     
|Account values as of year end                                                      |  |      |         |   |      |   |         |        |  |     
|Funding agreements backing medium-term notes                                        |  | $    | 4,599.5 |   |      | $ | 3,998.2 |        |  | 15% 
|Nationwide Bank                                                                     |  |      | 222.3   |   |      |   |        |        |  | NM  
|NFG                                                                                 |  |      | 2,840.6 |   |      |   | 3,019.6 |        |  | (6)%
|                                                                                    |  |      |         |   |      |   |         |        |  |     
|Total account values                                                                |  | $    | 7,662.4 |   |      | $ | 7,017.8 |        |  | 9%  
|                                                                                    |  |      |         |   |      |   |         |        |  |     



|1 | Excluding operating items (periodic net amounts paid or received on interest rate swaps that do not qualify for hedge
accounting treatment, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations).
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pre-tax operating earnings increased primarily due to higher other income and the aforementioned prior year
debt extinguishment costs, partially offset by higher other operating expenses.



Higher other income primarily was due to increases in revenues from retail asset management and retail broker/dealer operations of $22.8 million and $8.2 million, respectively.



Higher other operating expenses primarily were driven by
Nationwide Bank start-up costs of $14.0 million and increased retail broker/dealer project costs, partially offset by lower legal expenses due to favorable developments on several cases in 2006.



The Company recorded non-operating net realized investment
losses during 2006 compared to non-operating net realized gains in the prior year primarily due to an increase in gross losses on sales of fixed maturity securities, partially offset by lower current year impairments as 2005 included significant
losses on airline industry holdings.



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The following table summarizes net realized investment gains from continuing operations
by source for the years ended December 31:



|                                                              |  |      |       |   |      |   |       |  
|------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|(in millions)                                                 |  | 2006 |       |   | 2005 |  
|Total realized gains on sales, net of hedging losses          |  | $    | 98.7  |   |      | $ | 98.5  |  
|Total realized losses on sales, net of hedging gains          |  |      | (75.6 | ) |      |   | (28.7 | )
|Total other-than-temporary and other investment impairments   |  |      | (16.8 | ) |      |   | (41.2 | )
|Credit default swaps                                          |  |      | (1.1  | ) |      |   | (7.5  | )
|Periodic net coupon settlements on non-qualifying derivatives |  |      | 1.9   |   |      |   | 1.0   |  
|Other derivatives                                             |  |      | (0.6  | ) |      |   | 1.2   |  
|Trading portfolio valuation gain                              |  |      |      |   |      |   | 0.4   |  
|                                                              |  |      |       |   |      |   |       |  
|Total realized gains before adjustments                       |  |      | 6.5   |   |      |   | 23.7  |  
|Amounts credited to policyholder dividend obligation          |  |      | 0.1   |   |      |   | (5.2  | )
|Other                                                         |  |      | 2.5   |   |      |   | 2.3   |  
|                                                              |  |      |       |   |      |   |       |  
|Net realized investment gains                                 |  | $    | 9.1   |   |      | $ | 20.8  |  
|                                                              |  |      |       |   |      |   |       |  



The
following table summarizes for the year ended December 31, 2007 the Companys largest aggregate losses on sales and write-downs by issuer, the related circumstances giving rise to the losses and the circumstances that may have affected
other material investments held:



|                                                                                                                                                                                               |  |                             |         |                |   |       |                |  |   |                   |   |                          |   |       |  |   |      |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | -------------- | - | ----- | -------------- |  | - | ----------------- | - | ------------------------ | - | ----- |  | - | ---- | -
|                                                                                                                                                                                               |  |                             |         |                |   |       |                |  |   | December 31, 2007 |  
|(in millions)                                                                                                                                                                                  |  | Fair valueat sale(proceeds) |         | YTDloss onsale |   |       | YTDwrite-downs |  |   | Holdings1         |   | Netunrealizedgain (loss) |  
|U.S. government securities that were sold at a loss in 2007. No impairment is necessary on the remaining holdings.                                                                             |  | $                           | 1,232.7 |                | $ | (25.5 | )              |  | $ |                  |   |                          | $ | 418.1 |  | $ | 61.5 |  
|Ownership interest in a company that primarily provides financial services to small businesses. An impairment was recognized in the second and
third quarters of 2007.                         |  |                             | 7.2     |                |   | (0.2  | )              |  |   | (4.6              | ) |                          |   | 24.8  |  |   | (0.1 | )
|Ownership interest in an investment lending company. An impairment was recognized in the fourth quarter of 2007.                                                                               |  |                             |        |                |   |      |                |  |   | (52.0             | ) |                          |   |      |  |   |     |  
|Ownership interest in a mortgage-backed security. An impairment was recognized in the fourth quarter of 2007.2                                                                                 |  |                             |        |                |   |      |                |  |   | (15.0             | ) |                          |   | 37.9  |  |   | (1.1 | )
|Ownership interest in a mortgage-backed security. An impairment was recognized in the third and fourth quarters of 2007.2                                                                      |  |                             |        |                |   |      |                |  |   | (14.0             | ) |                          |   | 6.0   |  |   |     |  
|An investment vehicle that holds the rights to certain motion pictures created and/or distributed by a major entertainment company. An
impairment was recognized in the first quarter of 2007. |  |                             |        |                |   |      |                |  |   | (10.6             | ) |                          |   |      |  |   |     |  
|Ownership interest in a mortgage-backed security. An impairment was recognized in the fourth quarter of 2007.2                                                                                 |  |                             |        |                |   |      |                |  |   | (3.9              | ) |                          |   | 6.8   |  |   |     |  
|                                                                                                                                                                                               |  |                             |         |                |   |       |                |  |   |                   |   |                          |   |       |  |   |      |  
|Total                                                                                                                                                                                          |  | $                           | 1,239.9 |                | $ | (25.7 | )              |  | $ | (100.1            | ) |                          | $ | 493.6 |  | $ | 60.3 |  
|                                                                                                                                                                                               |  |                             |         |                |   |       |                |  |   |                   |   |                          |   |       |  |   |      |  



|1 | Holdings represent amortized cost of fixed maturity securities and cost of equity securities as of the date
indicated.
|- | ----------------------------------------------------------------------------------------------------------------------

|2 | Security with Sub-prime collateral.
|- | -----------------------------------



No other issuer had aggregate losses on sales and write-downs greater than 2.0% of the Companys total
gross losses on sales and write-downs on fixed maturity and equity securities.



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Liquidity and Capital Resources



Liquidity and capital resources demonstrate the overall financial strength of the Company and its ability to generate cash flows from its operations and borrow funds at competitive rates to meet operating and growth
needs.



The Companys capital structure
consists of long-term debt and shareholders equity. The following table summarizes the Companys capital structure as of December 31:



|                                                                       |  |      |         |   |      |   |         |  |   |        
|---------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- |  | - | -------
|(in millions)                                                          |  | 2007 |         |   | 2006 |   | 2005   
|Long-term debt                                                         |  | $    | 1,565.1 |   |      | $ | 1,398.5 |  | $ | 1,398.0
|                                                                       |  |      |         |   |      |   |         |  |   |        
|Shareholders equity, excluding accumulated other comprehensive income |  |      | 5,406.1 |   |      |   | 5,590.8 |  |   | 5,286.9
|Accumulated other comprehensive income                                 |  |      | (81.5   | ) |      |   | 31.9    |  |   | 100.7  
|                                                                       |  |      |         |   |      |   |         |  |   |        
|Total shareholders equity                                             |  |      | 5,324.6 |   |      |   | 5,622.7 |  |   | 5,387.6
|                                                                       |  |      |         |   |      |   |         |  |   |        
|Total capital                                                          |  | $    | 6,889.7 |   |      | $ | 7,021.2 |  | $ | 6,785.6
|                                                                       |  |      |         |   |      |   |         |  |   |        



NFS is
a holding company whose principal assets are the common stock of NLIC and NLICA. The principal sources of funds for NFS to pay interest, dividends and operating expenses are existing cash and investments and dividends from NLIC, NLICA and other
subsidiaries. See Part I, Item 1BusinessRegulationRegulation of Dividends and Other Payments from Insurance Companies for a description of NLIC and NLICA dividend limitations. NFS currently does not expect such
regulatory requirements to impair the ability of its insurance subsidiaries to pay sufficient dividends in order for NFS to have the necessary funds available to meet its obligations.



A primary liquidity concern with respect to annuity and life insurance products is the risk of early
policyholder withdrawal. The Company attempts to mitigate this risk by offering variable products where the investment risk is transferred to the policyholder, charging surrender fees at the time of withdrawal for certain products, applying a market
value adjustment to withdrawals for certain products in the Companys general account, and monitoring and matching anticipated cash inflows and outflows.



For individual annuity products ($50.84 billion and $50.34 billion of reserves as of December 31, 2007 and 2006, respectively),
surrender charges generally are calculated as a percentage of deposits and are assessed at declining rates during the first seven years after a deposit is made.



For group annuity products ($3.29 billion and $6.25 billion of reserves as of December 31, 2007 and 2006, respectively), surrender
charge amounts and periods can vary significantly depending on the terms of each contract and the compensation structure for the producer. Generally, surrender charge percentages for group products are less than individual products because the
Company incurs lower expenses at contract origination for group products. In addition, over ninety percent of the general account group annuity reserves are subject to a market value adjustment at withdrawal.



Life insurance policies are less susceptible to withdrawal
than annuity products because policyholders generally must undergo a new underwriting process and may incur a surrender fee in order to obtain a new insurance policy.



The short-term and long-term liquidity requirements of the Company are monitored regularly to match cash
inflows with cash requirements. The Company reviews its short-term and long-term projected sources and uses of funds and the asset/liability, investment and cash flow assumptions underlying these projections. The Company periodically makes
adjustments to its investment policies to reflect changes in short-term and long-term cash needs and changing business and economic conditions.



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Given the Companys historical cash flow and current financial results, management
of the Company believes that cash flows from operating activities over the next year will provide sufficient liquidity for the operations of the Company and sufficient funds for dividend and interest payments.



The Company has additional financing capacity under a shelf
registration statement dated May 14, 2007. Under the shelf registration statement, NFS can offer various security instruments including, but not limited to, unsecured senior or subordinated debt securities, preferred stock, Class A common
stock, warrants, stock purchase contracts or stock purchase units. In conjunction with owned trusts, capital securities guaranteed by NFS also may be issued.



SeePart II, Item 5Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securitiesfor a description of the Companys stock repurchase program and its impact on liquidity.



Short-Term Debt



The Company has available as a source of funds a $1.00 billion revolving variable rate credit facility entered into by NFS, NLIC and NMIC
with a group of national financial institutions. The facility provides for several and not joint liability with respect to any amount drawn by any party. The facility provides covenants, including, but not limited to, requirements that the
Companys debt not exceed 40% of tangible net worth, as defined, and that NLIC maintain statutory surplus, as defined, in excess of $1.67 billion. As of December 31, 2007, the Company and NLIC were in compliance with all covenants. The
Company had no amounts outstanding under this agreement as of December 31, 2007 and 2006. NLIC also has an $800.0 million commercial paper program and is required to maintain an available credit facility equal to 50% of any amounts outstanding
under the commercial paper program. Therefore, borrowing capacity under the aggregate $1.00 billion revolving credit facility is reduced by 50% of any amounts outstanding under the commercial paper program. NLIC had $199.7 million of commercial
paper outstanding at December 31, 2007 at a weighted average interest rate of 4.39% and no commercial paper outstanding at December 31, 2006.



NLIC has entered into an agreement with its custodial bank to borrow against the cash collateral that is posted in connection with its
securities lending program. This is an uncommitted facility contingent on the liquidity of the securities lending program. The borrowing facility was established to fund commercial mortgage loans that were originated with the intent of sale through
securitization. The maximum amount available under the agreement is $350.0 million. The borrowing rate on this program is equal to one-month U.S. London Interbank Offered Rate (LIBOR) (4.60% and 5.32% as of December 31, 2007 and 2006,
respectively). NLIC had $85.6 million and $75.2 million outstanding under this agreement as of December 31, 2007 and 2006, respectively. As of December 31, 2007, the Company had not provided any guarantees on such borrowings, either
directly or indirectly.



The Company also has a
wholly-owned subsidiary that has available a variable rate line of credit agreement with a single financial institution for advances of up to 90 days in amounts up to $50.0 million. The line of credit is collateralized by investments owned by the
subsidiary and is included in the consolidated balance sheets. The subsidiary had $14.0 million outstanding on that line of credit as of December 31, 2007 at a weighted average interest rate of 4.37%.



In addition, the Company has a majority-owned subsidiary that
has available an annually renewable, 364-day, $10.0 million variable rate line of credit agreement with a single financial institution. The line of credit is guaranteed by NFS and is included in the consolidated balance sheets. The subsidiary had
$10.0 million outstanding on that line of credit as of December 31, 2007 and 2006 at a weighted average interest rate of 5.54% in 2007 and 5.29% in 2006.



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The Company also has a wholly-owned subsidiary with a five-year letter of credit issuance
agreement with a single financial institution to provide up to $50.0 million in letters of credit. The agreement was effective September 30, 2006 and is guaranteed by NFS. The subsidiary had issued $40.6 million in letters of credit from this
facility as of December 31, 2007 and $24.7 million as of December 31, 2006.



Long-Term Debt



Long-term debt primarily is comprised of (1) two separate issuances of $300.0 million in principal amount of senior notes and two separate issuances of $200.0 million in principal amount of senior notes, none of which is subject to any
sinking fund payments; (2) a single issuance of $400.0 million in principal amount of fixed-to-floating rate junior subordinated notes; and (3) a single issuance of $100.0 million in principal amount of junior subordinated debentures that
are due March 1, 2037 and pay a distribution rate of 7.899%, issued to an unconsolidated subsidiary trust.



The $300.0 million principal of 6.25% senior notes due November 15, 2011 were issued in November 2001 and are not redeemable prior to
their maturity date. The $300.0 million principal of 5.90% senior notes due July 1, 2012, issued in June 2002, and the $200.0 million principal of 5.625% senior notes due February 13, 2015, issued in February 2003, are redeemable, in whole
or in part, at the option of NFS at any time or from time to time at a redemption price equal to the greater of: (1) 100% of the aggregate principal amount of the notes to be redeemed; or (2) the sum of the present value of the remaining
scheduled payments of principal and interest on the notes, discounted to the redemption date on a semi-annual basis at a prevailing U.S. Treasury rate plus 20 basis points, together in each case with accrued interest payments to the redemption date.
The $200.0 million principal of 5.10% senior notes due October 1, 2015 were issued in September 2005 and are redeemable, in whole or in part, at the option of NFS at any time or from time to time at a redemption price equal to the greater of:
(1) 100% of the aggregate principal amount of the notes to be redeemed; or (2) the sum of the present value of the remaining scheduled payments of principal and interest on the notes, discounted to the redemption date on a semi-annual
basis at a prevailing U.S. Treasury rate plus 15 basis points, together in each case with accrued interest payments to the redemption date.



The terms of each series of senior notes contain various restrictive business and financial covenants, including limitations on the
disposition of subsidiaries. As of December 31, 2007, the Company was in compliance with all such covenants.



On May 18, 2007, NFS issued $400.0 million principal of 6.75% fixed-to-floating rate junior subordinated notes. These notes bear
interest at a fixed rate of 6.75% for a 30-year period, after which the notes will bear interest at the rate of three-month U.S LIBOR plus 2.33%. These notes are redeemable under one of three scenarios. First, these notes are redeemable, in whole or
in part, at any time on or after May 15, 2037 at their principal amount plus accrued and unpaid interest to the date of redemption, provided that in the event of a redemption in part, the principal amount outstanding after such redemption is at
least $50.0 million. Next, these notes are redeemable, in whole or in part, prior to May 15, 2037, in cases not involving certain tax or rating agency events, at their principal amount plus accrued and unpaid interest to the date of redemption
or, if greater, the make-whole price, provided that in the event of redemption in part the principal amount outstanding after such redemption is at least $50.0 million. Make-whole price means the sum of the present values of
the outstanding principal (discounted from May 15, 2037) and remaining scheduled payments of interest that would have been payable to and including May 15, 2037 (discounted from their respective interest payment dates) on the notes to be
redeemed (not including any portion of such payments of interest accrued to the redemption date) to the redemption date on a semiannual basis at a prevailing U.S. Treasury rate plus 30 basis points, plus accrued and unpaid interest on the principal
amount being redeemed to the redemption date. Lastly, these notes are redeemable in whole, but not in part, prior to May 15, 2037, within 90 days after the occurrence of certain tax or rating agency events, at their principal amount plus
accrued and unpaid interest to the date of redemption or, if greater, the special event make-whole price. Special event make-whole price means the sum of the present values of the outstanding principal (discounted from
May 15, 2037) and remaining scheduled payments of



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interest that would have been payable to and including May 15, 2037 (discounted from their respective interest payment dates) on the notes to be
redeemed (not including any portion of such payments of interest accrued to the redemption date) to the redemption date on a semiannual basis at a prevailing U.S. Treasury rate plus 50 basis points, plus accrued and unpaid interest on the principal
amount being redeemed to the redemption date.



On March 11, 1997, Nationwide Financial Services Capital Trust I (Trust I) sold, in a public offering, $100.0 million principal of 7.899% capital securities, representing preferred undivided beneficial interests in the assets of Trust
I. This sale generated net proceeds of $98.3 million. Concurrent with the sale of the capital securities, NFS sold to Trust I $103.1 million principal of its 7.899% junior subordinated debentures due March 1, 2037. The junior subordinated
debentures are the sole assets of Trust I and are redeemable by NFS in whole at any time or in part from time to time at par plus an applicable make-whole premium. The related capital securities will mature or be called simultaneously with the
junior subordinated debentures and have a liquidation value of $1,000 per capital security. The capital securities are fully and unconditionally guaranteed by NFS, and there are no related sinking fund requirements. Distributions on the capital
securities are cumulative and payable semi-annually in arrears.



In addition, the Company has a wholly-owned subsidiary with fixed rate borrowings from various financial institutions totaling $65.0 million as of December 31, 2007 with interest rates ranging from 3.27% to
4.45%. These borrowings have maturity dates ranging from two to ten years, and all are secured by investments pledged by the subsidiary. The subsidiary made interest payments of $0.1 million in 2007.



Guarantees



See Note 19 to the audited consolidated financial statements
included in the F pages of this report for a description of the potential impact on liquidity of the Companys guarantees.



63



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##### Table of Contents

Contractual Obligations and Commitments



The following table summarizes the Companys contractual obligations and commitments as of December 31, 2007 expected to be paid in the periods presented. Payment amounts reflect the Companys estimate
of undiscounted cash flows related to these obligations and commitments. Balance sheet amounts were determined in accordance with GAAP and may differ from the summation of undiscounted cash flows. The most significant difference relates to future
policy benefits for life and health insurance, which include discounting.



|                                                        |  |                        |         |                        |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|------------------------------------------------------- |  | ---------------------- | ------- | ---------------------- | - | --------- |  | ---------------- | ------- | ----- | - | -------- |  | - | -------- |  | - | --------
|                                                        |  | Payments due by period |         | Amountper balancesheet
|(in millions)                                           |  | Less than1 year        |         | 1-3 years              |   | 3-5 years |  | More than5 years |         | Total |  
|Debt:                                                   |  |                        |         |                        |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Short-term1                                             |  | $                      | 313.7   |                        | $ |          |  | $                |        |       | $ |         |  |   | 313.7    |  | $ | 309.3   
|Long-term2:                                             |  |                        |         |                        |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Unrelated parties                                       |  |                        | 87.4    |                        |   | 194.8     |  |                  | 790.6   |       |   | 1,572.8  |  |   | 2,645.6  |  |   | 1,462.0 
|Related parties                                         |  |                        | 8.1     |                        |   | 16.3      |  |                  | 16.3    |       |   | 299.9    |  |   | 340.6    |  |   | 103.1   
|                                                        |  |                        |         |                        |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Subtotal                                                |  |                        | 409.2   |                        |   | 211.1     |  |                  | 806.9   |       |   | 1,872.7  |  |   | 3,299.9  |  |   | 1,874.4 
|                                                        |  |                        |         |                        |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Lease and license obligations3:                         |  |                        |         |                        |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Operating leases                                        |  |                        | 26.3    |                        |   | 33.5      |  |                  | 25.1    |       |   | 36.7     |  |   | 121.6    |  |   |        
|License                                                 |  |                        | 11.7    |                        |   | 24.2      |  |                  | 5.7     |       |   |         |  |   | 41.6     |  |   |        
|                                                        |  |                        |         |                        |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Subtotal                                                |  |                        | 38.0    |                        |   | 57.7      |  |                  | 30.8    |       |   | 36.7     |  |   | 163.2    |  |   |        
|                                                        |  |                        |         |                        |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Purchase and lending commitments:                       |  |                        |         |                        |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Fixed maturity securities4                              |  |                        | 47.4    |                        |   |          |  |                  |        |       |   |         |  |   | 47.4     |  |   |        
|Commercial mortgage loans4                              |  |                        | 77.1    |                        |   | 8.0       |  |                  |        |       |   |         |  |   | 85.1     |  |   |        
|Limited partnerships5                                   |  |                        | 159.4   |                        |   | 35.7      |  |                  | 35.7    |       |   |         |  |   | 230.8    |  |   |        
|                                                        |  |                        |         |                        |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Subtotal                                                |  |                        | 283.9   |                        |   | 43.7      |  |                  | 35.7    |       |   |         |  |   | 363.3    |  |   |        
|                                                        |  |                        |         |                        |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Future policy benefits and claims6:                     |  |                        |         |                        |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Fixed annuities and fixed option of variable annuities7 |  |                        | 1,829.8 |                        |   | 2,641.1   |  |                  | 1,790.7 |       |   | 3,282.7  |  |   | 9,544.3  |  |   | 9,344.6 
|Life and health insurance7                              |  |                        | 732.5   |                        |   | 1,668.6   |  |                  | 1,164.5 |       |   | 12,224.4 |  |   | 15,790.0 |  |   | 8,192.4 
|Single premium immediate annuities8                     |  |                        | 261.4   |                        |   | 481.2     |  |                  | 413.3   |       |   | 1,896.7  |  |   | 3,052.6  |  |   | 1,971.8 
|Group pension deferred fixed annuities9                 |  |                        | 1,230.0 |                        |   | 2,395.2   |  |                  | 2,102.3 |       |   | 9,410.1  |  |   | 15,137.6 |  |   | 10,973.1
|Funding agreements backing MTNs2, 10                    |  |                        | 1,005.4 |                        |   | 2,681.6   |  |                  | 1,525.2 |       |   | 249.7    |  |   | 5,461.9  |  |   | 4,959.6 
|                                                        |  |                        |         |                        |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Subtotal                                                |  |                        | 5,059.1 |                        |   | 9,867.7   |  |                  | 6,996.0 |       |   | 27,063.6 |  |   | 48,986.4 |  |   | 35,441.5
|                                                        |  |                        |         |                        |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Cash and securities collateral11:                       |  |                        |         |                        |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Cash collateral on securities lending                   |  |                        | 604.6   |                        |   |          |  |                  |        |       |   |         |  |   | 604.6    |  |   | 604.6   
|Cash collateral on derivative transactions              |  |                        | 245.4   |                        |   |          |  |                  |        |       |   |         |  |   | 245.4    |  |   | 245.4   
|Securities collateral on derivative transactions        |  |                        | 18.5    |                        |   |          |  |                  |        |       |   |         |  |   | 18.5     |  |   | 18.5    
|                                                        |  |                        |         |                        |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Subtotal                                                |  |                        | 868.5   |                        |   |          |  |                  |        |       |   |         |  |   | 868.5    |  |   | 868.5   
|                                                        |  |                        |         |                        |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Total                                                   |  | $                      | 6,658.7 |                        | $ | 10,180.2  |  | $                | 7,869.4 |       | $ | 28,973.0 |  | $ | 53,681.3 |  | $ | 38,184.4
|                                                        |  |                        |         |                        |   |           |  |                  |         |       |   |          |  |   |          |  |   |         



|1 | No contractual provisions exist that could create, increase or accelerate those obligations presented. The amount
presented includes contractual principal and interest based on rates in effect at December 31, 2007.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|2 | Contractual provisions exist that could increase or accelerate those obligations presented. The amounts presented
include contractual principal and interest based on stated rates in effect at December 31, 2007.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3 | Contractual provisions exist that could increase or accelerate those lease obligations presented, including various
leases with early buyouts and/or escalation clauses. However, the impact of any such transactions would not be material to the Companys financial position or results of operations.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4 | No contractual provisions exist that could create, accelerate or materially increase those obligations presented.
|- | -----------------------------------------------------------------------------------------------------------------

|5 | Primarily related to investments in low-income-housing tax credit partnerships. Call dates for the obligations
presented are either date or event specific. For date specific obligations, the Company is required to fund a specified amount on a stated date provided there are no defaults under the agreement. For event specific obligations, the Company is
required to fund a specified amount of its capital commitment when properties in a fund become fully stabilized. For event specific obligations, the call date of these commitments may extend beyond one year but has been reflected in payments due in
less than one year due to the call features. The Companys capital typically is called within one to four years, depending on the timing of events.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6 | A significant portion of policy contract benefits and claims to be paid do not have stated contractual maturity dates
and may not result in any ultimate payment obligation. Amounts reported represent estimated undiscounted cash flows out of the Companys general account related to death, surrender, annuity and other benefit payments under policy contracts in
force at December 31, 2007. Separate account payments are not reflected due to the matched nature of these obligations and because the contract owners bear the investment risk of such deposits. Estimated payment amounts were developed based on
the Companys historical experience and related contractual provisions. Significant assumptions incorporated in the reported amounts include future policy lapse rates (including the impact of customer decisions to make future premium payments
to keep the related policies in force); coverage levels remaining unchanged from those provided under contracts in force at December 31, 2007; future interest crediting rates; and estimated timing of payments. Actual amounts will vary,
potentially by a significant amount, from the amounts indicated due to deviations between assumptions and actual results and the addition of new business in future periods.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7 | Contractual provisions exist which could adjust the amount and/or timing of those obligations reported. Key
assumptions related to payments due by period include customer lapse and withdrawal rates (including timing of death), exchanges to and from the fixed and separate accounts of the variable annuities, claims experience with respect to variable
annuity guarantees, and future interest crediting level. Assumptions for future interest crediting levels were made based on processes consistent with the Companys past practices, which is at the discretion of the Company, subject to
guaranteed minimum crediting rates in many cases and/or subject to contractually obligated increases for specified time periods. Many of the contracts with potentially accelerated payments are subject to surrender charges, which are generally
calculated as a percentage of deposits made and are assessed at declining rates during the first seven years after a deposit is made. Amounts disclosed include an estimate of those accelerated payments, net of applicable surrender charges. See Note
2(j) to the audited consolidated financial statements included in the F pages of this report for a description of the Companys method for establishing life and annuity reserves in accordance with GAAP. Health reserves are immaterial and are
reflected in the less than one-year column.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8 | Certain assumptions have been made about mortality experience and retirement patterns in the amounts reported. Actual
deaths and retirements may differ significantly from those projected, which could cause the timing of the obligations reported to vary significantly. In addition, contractual surrender provisions exist on an immaterial portion of these contracts
that could accelerate those obligations presented. Amounts disclosed do not include an estimate of those accelerated payments. Most of the contracts with potentially accelerated payments are subject to surrender charges, which are generally
calculated as a percentage of the commuted value of the remaining term certain benefit payments and are assessed at declining rates during the first seven policy years.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|9 | Contractual provisions exist that could increase those obligations presented. The process for determining future
interest crediting rates as described in note 7 above was used to develop the estimates of payments due by period.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|10 | See Part II, Item 7MD&AOff-Balance Sheet Transactions for a detailed discussion of the
Companys MTN program. Amounts presented include contractual principal and interest based on rates in effect at December 31, 2007.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11 | Since the timing of the return of collateral is uncertain, these obligations have been reflected in payments due in
less than one year. See Part II, Item 7MD&AInvestmentsSecurities Lending and Counterparty Risk Associated with Derivativesfor a detailed discussion of the impact of collateral on the Companys consolidated
balance sheets.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Off-Balance Sheet Transactions



Under the MTN program, NLIC issues funding agreements to an unconsolidated third party trust to secure notes issued to investors by the trust. The funding agreements rank equal with all other insurance claims of the
issuing company in the event of liquidation and should be treated as annuities under applicable Ohio insurance law. Therefore, the funding agreement obligations are classified as a component of future policy benefits and claims on the
consolidated balance sheets. Because the Company is not the primary beneficiary of, and has no ownership interest in, or control over, the third party trust that issues the MTNs, the Company does not include the trust in its consolidated financial
statements. Since the notes issued by the trust have a secured interest in the funding agreements issued by the Company, Moodys and S&P assign the same ratings to the notes and the insurance financial strength of NLIC. See Part II,
Item 7MD&AInvestmentsSecurities Lendingfor information about off-balance sheet collateral related to the Companys securities lending program.



Investments



General



The Companys assets are divided
between separate account and general account assets. As of December 31, 2007, $72.86 billion (61%) of the Companys total assets were held in separate accounts ($70.69 billion, or 59%, as of December 31, 2006) and $46.35 billion
(39%) were held in the Companys general account ($48.84 billion, or 41%, as of December 31, 2006), including $39.07 billion of general account investments ($41.26 billion as of December 31, 2006).



Separate account assets consist primarily of deposits from
the Companys variable annuity and variable life insurance business. Most separate account assets are invested in various mutual funds. All of the investment performance in the Companys separate account assets is passed through to the
Companys customers. See Note 6 to the audited consolidated financial statements included in the F pages of this report for further information regarding the Companys investments.



The following table summarizes the Companys
consolidated general account investments by asset category as of December 31:



|                                   |  |               |          |           |       |               |   |           |  |      
|---------------------------------- |  | ------------- | -------- | --------- | ----- | ------------- | - | --------- |  | -----
|                                   |  | 2007          |          | 2006     
|(dollars in millions)              |  | Carryingvalue |          | % oftotal |       | Carryingvalue |   | % oftotal
|                                   |  |               |         
|Fixed maturity securities          |  | $             | 27,189.2 |           | 69.6  |               | $ | 28,160.0  |  | 68.3 
|Equity securities                  |  |               | 124.2    |           | 0.3   |               |   | 67.6      |  | 0.2  
|Trading assets                     |  |               | 37.7     |           | 0.1   |               |   | 24.3      |  | 0.1  
|Mortgage loans on real estate, net |  |               | 8,316.1  |           | 21.3  |               |   | 8,909.8   |  | 21.6 
|Real estate, net                   |  |               | 21.8     |           | 0.1   |               |   | 59.1      |  | 0.1  
|Policy loans                       |  |               | 1,018.3  |           | 2.6   |               |   | 966.9     |  | 2.3  
|Other long-term investments        |  |               | 1,187.2  |           | 3.0   |               |   | 856.0     |  | 2.0  
|Short-term investments             |  |               | 1,173.6  |           | 3.0   |               |   | 2,215.6   |  | 5.4  
|                                   |  |               |          |           |       |               |   |           |  |      
|Total                              |  | $             | 39,068.1 |           | 100.0 |               | $ | 41,259.3  |  | 100.0
|                                   |  |               |          |           |       |               |   |           |  |      



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The following table lists the ten largest fixed maturity investment holdings by estimated
fair value for both investment grade and non-investment grade securities included in the general account as of December 31, 2007 (excluding U.S. Treasury securities, obligations of U.S. Government corporations, and agency bonds not backed by
the full faith and credit of the U.S. Government):



|                                                 |  |                    |  |                     |       |                      |                            |                    |      |                     |   |     
|------------------------------------------------ |  | ------------------ |  | ------------------- | ----- | -------------------- | -------------------------- | ------------------ | ---- | ------------------- | - | ----
|(in millions)                                    |  | PredominantRating1 |  | EstimatedFair Value |       |                      |                            | PredominantRating1 |      | EstimatedFair Value
|                                                 |  |                    |  |                     |      
|Investment Grade                                 |  |                    |  |                     |       | Non-Investment Grade |                            |                    |      |                    
|Countrywide Alternative Loan Trust               |  | AAA                |  | $                   | 300.9 |                      | MGM Mirage                 |                    | BB   |                     | $ | 35.6
|CS First Boston Mortgage Securities Corporation  |  | AAA                |  |                     | 170.0 |                      | Knight-Ridder, Inc.        |                    | B+   |                     |   | 32.0
|Bank of America Corporation                      |  | AA                 |  |                     | 152.4 |                      | Buffalo Rock Company, Inc. |                    | BB+  |                     |   | 31.3
|Bear Sterns Commercial Mortgage Securities, Inc. |  | AA                 |  |                     | 148.2 |                      | Northern Foods, PLC        |                    | BB+  |                     |   | 29.5
|Master Asset Securitization Trust                |  | AAA                |  |                     | 146.3 |                      | Seminole Tribe of Florida  |                    | BB+  |                     |   | 27.9
|Lehman Mortgage Trust                            |  | AAA                |  |                     | 129.7 |                      | Northwest Airlines         |                    | BB-  |                     |   | 27.8
|Morgan Stanley Capital I                         |  | AAA                |  |                     | 113.6 |                      | Deluxe Corporation         |                    | BB-  |                     |   | 24.7
|Residential Accredit Loans, Inc.                 |  | AAA                |  |                     | 101.3 |                      | Ruby Tuesday, Inc.         |                    | BBB- |                     |   | 24.6
|Structured Asset Securities Corporation          |  | AAA                |  |                     | 101.0 |                      | Avis Finance Company, PLC  |                    | C    |                     |   | 23.8
|LB-UBS Commercial Mortgage Trust                 |  | AA                 |  |                     | 100.3 |                      | Northern Rock PLC          |                    | B-   |                     |   | 21.7



|1 | Based on a weighted average of ratings by Moodys and S&P.
|- | ----------------------------------------------------------



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Securities Available-for-Sale



The following table summarizes the amortized cost, gross unrealized gains and losses, and estimated fair
values of securities available-for-sale as of the dates indicated:



|                                                                         |  |               |          |                      |   |                       |  |                     |       |  |   |         
|------------------------------------------------------------------------ |  | ------------- | -------- | -------------------- | - | --------------------- |  | ------------------- | ----- |  | - | --------
|(in millions)                                                            |  | Amortizedcost |          | Grossunrealizedgains |   | Grossunrealizedlosses |  | Estimatedfair value
|December 31, 2007:                                                       |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Fixed maturity securities:                                               |  |               |          |                      |   |                       |  |                     |       |  |   |         
|U.S. Treasury securities and obligations of U.S. Government corporations |  | $             | 172.8    |                      | $ | 17.4                  |  | $                   | 0.9   |  | $ | 189.3   
|Agencies not backed by the full faith and credit of the U.S. Government  |  |               | 418.1    |                      |   | 61.5                  |  |                     |      |  |   | 479.6   
|Obligations of states and political subdivisions                         |  |               | 273.3    |                      |   | 1.7                   |  |                     | 2.8   |  |   | 272.2   
|Debt securities issued by foreign governments                            |  |               | 56.2     |                      |   | 2.5                   |  |                     | 0.3   |  |   | 58.4    
|Corporate securities                                                     |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Public                                                                   |  |               | 9,233.2  |                      |   | 175.2                 |  |                     | 178.8 |  |   | 9,229.6 
|Private                                                                  |  |               | 6,010.7  |                      |   | 135.7                 |  |                     | 66.9  |  |   | 6,079.5 
|Mortgage-backed securities                                               |  |               | 7,142.5  |                      |   | 40.3                  |  |                     | 108.2 |  |   | 7,074.6 
|Asset-backed securities                                                  |  |               | 3,957.1  |                      |   | 33.4                  |  |                     | 184.5 |  |   | 3,806.0 
|                                                                         |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Total fixed maturity securities                                          |  |               | 27,263.9 |                      |   | 467.7                 |  |                     | 542.4 |  |   | 27,189.2
|Equity securities                                                        |  |               | 117.5    |                      |   | 8.3                   |  |                     | 1.6   |  |   | 124.2   
|                                                                         |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Total securities available-for-sale                                      |  | $             | 27,381.4 |                      | $ | 476.0                 |  | $                   | 544.0 |  | $ | 27,313.4
|                                                                         |  |               |          |                      |   |                       |  |                     |       |  |   |         
|December 31, 2006:                                                       |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Fixed maturity securities:                                               |  |               |          |                      |   |                       |  |                     |       |  |   |         
|U.S. Treasury securities and obligations of U.S. Government corporations |  | $             | 179.0    |                      | $ | 12.2                  |  | $                   | 2.1   |  | $ | 189.1   
|Agencies not backed by the full faith and credit of the U.S. Government  |  |               | 564.5    |                      |   | 46.2                  |  |                     | 2.3   |  |   | 608.4   
|Obligations of states and political subdivisions                         |  |               | 274.7    |                      |   | 0.7                   |  |                     | 7.4   |  |   | 268.0   
|Debt securities issued by foreign governments                            |  |               | 36.2     |                      |   | 1.7                   |  |                     | 0.2   |  |   | 37.7    
|Corporate securities                                                     |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Public                                                                   |  |               | 9,732.8  |                      |   | 220.0                 |  |                     | 127.4 |  |   | 9,825.4 
|Private                                                                  |  |               | 6,605.1  |                      |   | 131.5                 |  |                     | 83.8  |  |   | 6,652.8 
|Mortgage-backed securities                                               |  |               | 6,946.0  |                      |   | 23.8                  |  |                     | 122.8 |  |   | 6,847.0 
|Asset-backed securities                                                  |  |               | 3,728.9  |                      |   | 45.5                  |  |                     | 42.8  |  |   | 3,731.6 
|                                                                         |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Total fixed maturity securities                                          |  |               | 28,067.2 |                      |   | 481.6                 |  |                     | 388.8 |  |   | 28,160.0
|Equity securities                                                        |  |               | 57.2     |                      |   | 11.0                  |  |                     | 0.6   |  |   | 67.6    
|                                                                         |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Total securities available-for-sale                                      |  | $             | 28,124.4 |                      | $ | 492.6                 |  | $                   | 389.4 |  | $ | 28,227.6
|                                                                         |  |               |          |                      |   |                       |  |                     |       |  |   |         



The
average duration and average maturity of the Companys general account fixed maturity securities as of December 31, 2007 were approximately 4.3 years and 5.8 years, respectively, compared to 4.4 years and 5.9 years, respectively, as of
December 31, 2006. The market value of the Companys general account investments may fluctuate significantly in response to changes in interest rates, investment quality ratings and credit spreads. In addition, the Company may be likely to
experience realized investment losses to the extent its liquidity needs require the disposition of general account fixed maturity securities in unfavorable interest rate, liquidity or credit spread environments.



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For securities available-for-sale as of the dates indicated, the following table
summarizes the Companys gross unrealized losses based on the amount of time each type of security has been in an unrealized loss position:



|                                                                         |                     |                               |                       |  |                   |                     |   |                       |   |          |                     |   |                       |   |  |   |          |  |   |      
|------------------------------------------------------------------------ | ------------------- | ----------------------------- | --------------------- |  | ----------------- | ------------------- | - | --------------------- | - | -------- | ------------------- | - | --------------------- | - |  | - | -------- |  | - | -----
|(in millions)                                                            |                     | Less than or equalto one year |                       |  | Morethan one year |                     |   | Total                
|                                                                         | Estimatedfair value |                               | Grossunrealizedlosses |  |                   | Estimatedfair value |   | Grossunrealizedlosses |   |          | Estimatedfair value |   | Grossunrealizedlosses
|                                                                         |                     |                               |                       |  |                  
|                                                                         |                     |                               |                       |  |                  
|December 31, 2007:                                                       |                     |                               |                       |  |                   |                     |   |                       |   |          |                     |   |                       |   |  |   |          |  |   |      
|Fixed maturity securities:                                               |                     |                               |                       |  |                   |                     |   |                       |   |          |                     |   |                       |   |  |   |          |  |   |      
|U.S. Treasury securities and obligations of U.S. Government corporations |                     | $                             | 23.7                  |  | $                 | 0.6                 |   |                       | $ | 4.2      |                     | $ | 0.3                   |   |  | $ | 27.9     |  | $ | 0.9  
|Agencies not backed by the full faith and credit of the U.S. Government  |                     |                               |                      |  |                   |                    |   |                       |   | 13.9     |                     |   |                      |   |  |   | 13.9     |  |   |     
|Obligations of states and political subdivisions                         |                     |                               | 23.9                  |  |                   | 0.2                 |   |                       |   | 154.3    |                     |   | 2.6                   |   |  |   | 178.2    |  |   | 2.8  
|Debt securities issued by foreign governments                            |                     |                               | 26.4                  |  |                   | 0.3                 |   |                       |   | 1.2      |                     |   |                      |   |  |   | 27.6     |  |   | 0.3  
|Corporate securities                                                     |                     |                               |                       |  |                   |                     |   |                       |   |          |                     |   |                       |   |  |   |          |  |   |      
|Public                                                                   |                     |                               | 2,452.6               |  |                   | 103.4               |   |                       |   | 2,287.7  |                     |   | 75.4                  |   |  |   | 4,740.3  |  |   | 178.8
|Private                                                                  |                     |                               | 740.4                 |  |                   | 18.8                |   |                       |   | 2,076.6  |                     |   | 48.1                  |   |  |   | 2,817.0  |  |   | 66.9 
|Mortgage-backed securities                                               |                     |                               | 1,448.4               |  |                   | 27.6                |   |                       |   | 2,775.7  |                     |   | 80.6                  |   |  |   | 4,224.1  |  |   | 108.2
|Asset-backed securities                                                  |                     |                               | 1,515.3               |  |                   | 132.3               |   |                       |   | 1,211.6  |                     |   | 52.2                  |   |  |   | 2,726.9  |  |   | 184.5
|                                                                         |                     |                               |                       |  |                   |                     |   |                       |   |          |                     |   |                       |   |  |   |          |  |   |      
|Total fixed maturity securities                                          |                     |                               | 6,230.7               |  |                   | 283.2               |   |                       |   | 8,525.2  |                     |   | 259.2                 |   |  |   | 14,755.9 |  |   | 542.4
|Equity securities                                                        |                     |                               | 37.5                  |  |                   | 1.6                 |   |                       |   | 0.1      |                     |   |                      |   |  |   | 37.6     |  |   | 1.6  
|                                                                         |                     |                               |                       |  |                   |                     |   |                       |   |          |                     |   |                       |   |  |   |          |  |   |      
|Total                                                                    |                     | $                             | 6,268.2               |  | $                 | 284.8               |   |                       | $ | 8,525.3  |                     | $ | 259.2                 |   |  | $ | 14,793.5 |  | $ | 544.0
|                                                                         |                     |                               |                       |  |                   |                     |   |                       |   |          |                     |   |                       |   |  |   |          |  |   |      
|% of gross unrealized losses                                             |                     |                               |                       |  |                   | 52                  | % |                       |   |          |                     |   | 48                    | % |  |   |          |  |   |      
|December 31, 2006:                                                       |                     |                               |                       |  |                   |                     |   |                       |   |          |                     |   |                       |   |  |   |          |  |   |      
|Fixed maturity securities:                                               |                     |                               |                       |  |                   |                     |   |                       |   |          |                     |   |                       |   |  |   |          |  |   |      
|U.S. Treasury securities and obligations of U.S. Government corporations |                     | $                             | 66.5                  |  | $                 | 1.0                 |   |                       | $ | 29.9     |                     | $ | 1.1                   |   |  | $ | 96.4     |  | $ | 2.1  
|Agencies not backed by the full faith and credit of the U.S. Government  |                     |                               | 31.7                  |  |                   | 0.1                 |   |                       |   | 125.2    |                     |   | 2.2                   |   |  |   | 156.9    |  |   | 2.3  
|Obligations of states and political subdivisions                         |                     |                               | 84.5                  |  |                   | 1.0                 |   |                       |   | 161.9    |                     |   | 6.4                   |   |  |   | 246.4    |  |   | 7.4  
|Debt securities issued by foreign governments                            |                     |                               | 12.8                  |  |                   | 0.1                 |   |                       |   | 1.3      |                     |   | 0.1                   |   |  |   | 14.1     |  |   | 0.2  
|Corporate securities                                                     |                     |                               |                       |  |                   |                     |   |                       |   |          |                     |   |                       |   |  |   |          |  |   |      
|Public                                                                   |                     |                               | 2,627.7               |  |                   | 27.8                |   |                       |   | 3,525.8  |                     |   | 99.6                  |   |  |   | 6,153.5  |  |   | 127.4
|Private                                                                  |                     |                               | 1,288.6               |  |                   | 15.0                |   |                       |   | 2,165.1  |                     |   | 68.8                  |   |  |   | 3,453.7  |  |   | 83.8 
|Mortgage-backed securities                                               |                     |                               | 966.9                 |  |                   | 7.6                 |   |                       |   | 4,194.0  |                     |   | 115.2                 |   |  |   | 5,160.9  |  |   | 122.8
|Asset-backed securities                                                  |                     |                               | 580.2                 |  |                   | 4.5                 |   |                       |   | 1,475.0  |                     |   | 38.3                  |   |  |   | 2,055.2  |  |   | 42.8 
|                                                                         |                     |                               |                       |  |                   |                     |   |                       |   |          |                     |   |                       |   |  |   |          |  |   |      
|Total fixed maturity securities                                          |                     |                               | 5,658.9               |  |                   | 57.1                |   |                       |   | 11,678.2 |                     |   | 331.7                 |   |  |   | 17,337.1 |  |   | 388.8
|Equity securities                                                        |                     |                               | 17.6                  |  |                   | 0.3                 |   |                       |   | 3.4      |                     |   | 0.3                   |   |  |   | 21.0     |  |   | 0.6  
|                                                                         |                     |                               |                       |  |                   |                     |   |                       |   |          |                     |   |                       |   |  |   |          |  |   |      
|Total                                                                    |                     | $                             | 5,676.5               |  | $                 | 57.4                |   |                       | $ | 11,681.6 |                     | $ | 332.0                 |   |  | $ | 17,358.1 |  | $ | 389.4
|                                                                         |                     |                               |                       |  |                   |                     |   |                       |   |          |                     |   |                       |   |  |   |          |  |   |      
|% of gross unrealized losses                                             |                     |                               |                       |  |                   | 15                  | % |                       |   |          |                     |   | 85                    | % |  |   |          |  |   |      



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The Company has assets that have been in an unrealized loss position for more than one
year that are not other-than-temporarily impaired. The Company reviews each asset in an unrealized loss position and evaluates whether or not the loss is other-than-temporary. This evaluation considers several factors, including the extent of the
unrealized loss, the rating of the affected security, the Companys ability and intent to hold the security until recovery, and economic conditions that could affect the creditworthiness of the issuer. As of December 31, 2007, assets that have
been in an unrealized loss position for more than one year totaled $259.2 million, or 48% of the Companys total unrealized losses. Of this total, $231.8 million, or 89%, were classified as investment grade securities, as defined by the NAIC.



As noted in the table above, the majority of
the increases in the Companys unrealized losses from December 31, 2006 to December 31, 2007 were attributable to corporate securities and asset-backed securities (ABSs). These increased loss positions primarily were driven by the combined
impacts of interest rate movements, volatility in investment quality ratings and credit spreads, and illiquid markets.



As of December 31, 2007, 67% of the Companys corporate securities in unrealized loss positions, or $164.1 million, were classified
as investment grade, as defined by the NAIC. Of these investment grade corporate securities, 58%, or $95.9 million, have been in an unrealized loss position for more than one year, but 90% of those investments have ratios of estimated fair value to
amortized cost of at least 90%. Of the Companys corporate securities in unrealized loss positions classified as non-investment grade, 66% have been in an unrealized loss position for less than one year.



As of December 31, 2007, 100% of the Companys ABSs in
unrealized loss positions, or $184.5 million, were classified as investment grade, as defined by the NAIC. Of these investment grade ABSs, 72%, or $132.0 million, have been in an unrealized loss position for less than one year, but 33% of those
investments have ratios of estimated fair value to amortized cost of at least 90%. Of the Companys ABSs in unrealized loss positions that have been in loss positions for more than one year, 58% have ratios of estimated fair value to amortized
cost of at least 90%.



For fixed maturity
securities that are available-for-sale as of December 31, 2007, the following table summarizes the Companys gross unrealized loss position categorized as investment grade vs. non-investment grade, as defined by the NAIC, in an unrealized
loss position for the period of time indicated, and based on the ratio of estimated fair value to amortized cost (in millions):



|                                               |  |                                                      |       |                      |   |       |  |                            |       |                 |   |       |  |                            |      |                 |   |       |  |   |       |  |   |       |  |   |      
|---------------------------------------------- |  | ---------------------------------------------------- | ----- | -------------------- | - | ----- |  | -------------------------- | ----- | --------------- | - | ----- |  | -------------------------- | ---- | --------------- | - | ----- |  | - | ----- |  | - | ----- |  | - | -----
|                                               |  | Period of time for which unrealized loss has existed
|                                               |  | Investment Grade                                     |       | Non-Investment Grade |   | Total
|Ratio of estimated fair value toamortized cost |  | Lessthan orequal tooneyear                           |       | Morethanoneyear      |   | Total |  | Lessthan orequalto oneyear |       | Morethanoneyear |   | Total |  | Lessthan orequal tooneyear |      | Morethanoneyear |   | Total
|99.9% - 95.0%                                  |  | $                                                    | 68.9  |                      | $ | 116.2 |  | $                          | 185.1 |                 | $ | 15.5  |  | $                          | 7.0  |                 | $ | 22.5  |  | $ | 84.4  |  | $ | 123.2 |  | $ | 207.6
|94.9% - 90.0%                                  |  |                                                      | 50.3  |                      |   | 84.0  |  |                            | 134.3 |                 |   | 11.4  |  |                            | 4.1  |                 |   | 15.5  |  |   | 61.7  |  |   | 88.1  |  |   | 149.8
|89.9% - 85.0%                                  |  |                                                      | 37.6  |                      |   | 18.9  |  |                            | 56.5  |                 |   | 3.8   |  |                            | 7.5  |                 |   | 11.3  |  |   | 41.4  |  |   | 26.4  |  |   | 67.8 
|84.9% - 80.0%                                  |  |                                                      | 12.8  |                      |   | 5.8   |  |                            | 18.6  |                 |   | 3.0   |  |                            | 1.4  |                 |   | 4.4   |  |   | 15.8  |  |   | 7.2   |  |   | 23.0 
|Below 80.0%                                    |  |                                                      | 59.2  |                      |   | 6.9   |  |                            | 66.1  |                 |   | 20.7  |  |                            | 7.4  |                 |   | 28.1  |  |   | 79.9  |  |   | 14.3  |  |   | 94.2 
|                                               |  |                                                      |       |                      |   |       |  |                            |       |                 |   |       |  |                            |      |                 |   |       |  |   |       |  |   |       |  |   |      
|Total                                          |  | $                                                    | 228.8 |                      | $ | 231.8 |  | $                          | 460.6 |                 | $ | 54.4  |  | $                          | 27.4 |                 | $ | 81.8  |  | $ | 283.2 |  | $ | 259.2 |  | $ | 542.4
|                                               |  |                                                      |       |                      |   |       |  |                            |       |                 |   |       |  |                            |      |                 |   |       |  |   |       |  |   |       |  |   |      



As
noted in the table above, as of December 31, 2007, 65% of the Companys investments in an unrealized loss position had ratios of estimated fair value to amortized cost of at least 90%. In addition, 84% of the Companys investments in an
unrealized loss position were classified as investment grade, as defined by the NAIC. Of the Companys investments in unrealized loss positions classified as non-investment grade, 67% have been in an unrealized loss position for less than one
year.



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The NAIC assigns securities quality ratings and uniform valuations (called NAIC
Designations), which are used by insurers when preparing their annual statements. The NAIC assigns designations to publicly traded and privately placed securities. The designations assigned by the NAIC range from class 1 (highest quality) to class 6
(lowest quality). Of the Companys general account fixed maturity securities, 94% were in the two highest NAIC Designations as of December 31, 2007 and 2006.



The following table summarizes the credit quality, as determined by NAIC Designation, of the Companys general account
fixed maturity securities portfolio as of December 31:



|                  |  |                                       |               |      |                     |      |               |          |                     |   |          |  |   |         
|----------------- |  | ------------------------------------- | ------------- | ---- | ------------------- | ---- | ------------- | -------- | ------------------- | - | -------- |  | - | --------
|(in millions)     |  | Rating agency equivalent designation2 |               | 2007 |                     | 2006
|NAIC designation1 |  |                                       | Amortizedcost |      | Estimatedfair value |      | Amortizedcost |          | Estimatedfair value
|1                 |  | Aaa/Aa/A                              |               | $    | 19,153.4            |      | $             | 19,056.5 |                     | $ | 19,362.3 |  | $ | 19,351.3
|2                 |  | Baa                                   |               |      | 6,445.9             |      |               | 6,512.7  |                     |   | 6,928.8  |  |   | 6,997.2 
|3                 |  | Ba                                    |               |      | 1,194.0             |      |               | 1,166.7  |                     |   | 1,091.5  |  |   | 1,101.6 
|4                 |  | B                                     |               |      | 348.2               |      |               | 341.6    |                     |   | 647.8    |  |   | 659.8   
|5                 |  | Caa and lower                         |               |      | 83.8                |      |               | 73.1     |                     |   | 18.5     |  |   | 27.3    
|6                 |  | In or near default                    |               |      | 38.6                |      |               | 38.6     |                     |   | 18.3     |  |   | 22.8    
|                  |  |                                       |               |      |                     |      |               |          |                     |   |          |  |   |         
|                  |  | Total                                 |               | $    | 27,263.9            |      | $             | 27,189.2 |                     | $ | 28,067.2 |  | $ | 28,160.0
|                  |  |                                       |               |      |                     |      |               |          |                     |   |          |  |   |         



|1 | NAIC Designations are assigned at least annually. Some designations for securities shown have been assigned to
securities not yet assigned an NAIC Designation in a manner approximating equivalent public rating categories.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | Comparisons between NAIC and Moodys designations are published by the NAIC. If no Moodys rating is
available, the Company assigns internal ratings corresponding to public ratings.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Mortgage-Backed and Asset-Backed Securities



The Companys general account MBS portfolio is comprised of residential MBS investments. As of December 31, 2007, MBS
investments totaled $7.07 billion (26%) of the carrying value of the Companys general account fixed maturity securities available-for-sale compared to $6.85 billion (24%) as of December 31, 2006.



The Company believes that MBS investments may add
diversification, liquidity, credit quality and additional yield to its general account portfolio. The Companys objective for its MBS portfolio is to provide reasonable cash flow stability and increased yield. The MBS portfolio includes CMOs,
Real Estate Mortgage Investment Conduits (REMICs) and mortgage-backed pass-through securities. The Companys general account MBS portfolio generally does not include interest-only securities, principal-only securities or other MBS investments
which may exhibit extreme market volatility.



Prepayment/extension risk is an inherent risk of holding MBSs. However, the degree of prepayment/extension risk varies by the type of MBS held. The Company limits its exposure to prepayments/extensions by holding less volatile types of
MBSs. As of December 31, 2007, $2.07 billion (29%) of the carrying value of the general account MBS portfolio was invested in planned amortization class CMOs/REMICs (PACs) compared to $2.36 billion (35%) as of December 31, 2006.
PACs are securities whose cash flows are designed to remain constant in a variety of mortgage prepayment environments. Most of the Companys non-PAC MBSs possess varying degrees of cash flow structure and prepayment/extension risk. The MBS
portfolio contained 8% of pure pass-throughs as of December 31, 2007 compared to 5% as of December 31, 2006.



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The following table summarizes the distribution by investment type of the Companys
general account MBS portfolio as of December 31:



|                                                |  |                     |         |           |       |                     |   |           |  |      
|----------------------------------------------- |  | ------------------- | ------- | --------- | ----- | ------------------- | - | --------- |  | -----
|                                                |  | 2007                |         | 2006     
|(dollars in millions)                           |  | Estimatedfair value |         | % oftotal |       | Estimatedfair value |   | % oftotal
|Planned amortization class                      |  | $                   | 2,067.7 |           | 29.2  |                     | $ | 2,362.9   |  | 34.5 
|Sequential                                      |  |                     | 1,528.5 |           | 21.6  |                     |   | 1,539.7   |  | 22.5 
|Non-accelerating securitiesCMO                 |  |                     | 1,450.3 |           | 20.5  |                     |   | 1,532.7   |  | 22.4 
|Very accurately defined maturity                |  |                     | 645.0   |           | 9.1   |                     |   | 784.6     |  | 11.5 
|Multi-family mortgage pass-through certificates |  |                     | 548.7   |           | 7.8   |                     |   | 367.5     |  | 5.4  
|Floating rate                                   |  |                     | 361.7   |           | 5.1   |                     |   | 54.4      |  | 0.8  
|Accrual                                         |  |                     | 77.4    |           | 1.1   |                     |   | 116.8     |  | 1.7  
|Other                                           |  |                     | 395.3   |           | 5.6   |                     |   | 88.4      |  | 1.2  
|                                                |  |                     |         |           |       |                     |   |           |  |      
|Total                                           |  | $                   | 7,074.6 |           | 100.0 |                     | $ | 6,847.0   |  | 100.0
|                                                |  |                     |         |           |       |                     |   |           |  |      



The
Companys general account ABS portfolio includes home equity and credit card-backed investments, among others. As of December 31, 2007, ABS investments totaled $3.81 billion (14%) of the carrying value of the Companys general
account fixed maturity securities available-for-sale compared to $3.73 billion (13%) as of December 31, 2006.



The Company believes that general account ABS investments may add diversification, liquidity, credit quality and additional yield to its
general account portfolio. Like the MBS portfolio, the Companys objective for its ABS portfolio is to provide reasonable cash flow stability and increased yield. The Companys general account ABS portfolio generally does not include
interest-only securities, principal-only securities or other ABS investments which may exhibit extreme market volatility.



The following table summarizes the distribution by investment type of the Companys general account ABS portfolio as of
December 31:



|                                          |                     |      |           |      |                     |  |           |         |  |      
|----------------------------------------- | ------------------- | ---- | --------- | ---- | ------------------- |  | --------- | ------- |  | -----
|(dollars in millions)                     |                     | 2007 |           | 2006
|                                          | Estimatedfair value |      | % oftotal |      | Estimatedfair value |  | % oftotal
|Commercial mortgage-backed securities     |                     | $    | 1,216.5   |      | 32.0                |  | $         | 1,245.8 |  | 33.5 
|Home equity/improvement                   |                     |      | 858.5     |      | 22.6                |  |           | 750.8   |  | 20.1 
|CBO/CLO/CDO                               |                     |      | 343.3     |      | 9.0                 |  |           | 225.6   |  | 6.0  
|Trust preferredresidual income           |                     |      | 341.4     |      | 9.0                 |  |           | 326.5   |  | 8.7  
|Credit card-backed                        |                     |      | 326.1     |      | 8.6                 |  |           | 398.1   |  | 10.7 
|Non-accelerated securities                |                     |      | 176.1     |      | 4.6                 |  |           | 189.6   |  | 5.1  
|Enhanced equity/equity trust certificates |                     |      | 126.2     |      | 3.3                 |  |           | 146.9   |  | 3.9  
|Franchise/business loan                   |                     |      | 110.7     |      | 2.9                 |  |           | 57.8    |  | 1.5  
|Pass-through certificate                  |                     |      | 80.8      |      | 2.1                 |  |           | 110.0   |  | 2.9  
|Student loans                             |                     |      | 50.5      |      | 1.3                 |  |           | 84.5    |  | 2.3  
|Other                                     |                     |      | 175.9     |      | 4.6                 |  |           | 196.0   |  | 5.3  
|                                          |                     |      |           |      |                     |  |           |         |  |      
|Total                                     |                     | $    | 3,806.0   |      | 100.0               |  | $         | 3,731.6 |  | 100.0
|                                          |                     |      |           |      |                     |  |           |         |  |      



When
making investments in mortgage-backed or asset-backed securities, the Company evaluates the quality of the underlying collateral, the structure of the transaction (which dictates how losses in the underlying collateral will be distributed) and
prepayment risks.



Recent conditions in the
securities markets, including changes in interest rates, investment quality ratings, liquidity and credit spreads, have resulted in declines in the values of investment securities, including MBSs and ABSs. When evaluating whether these securities
are other-than-temporarily impaired, the Company considers



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characteristics of the underlying collateral, such as delinquency and default rates, the quality of the underlying borrower, the type of collateral in the
pool, the vintage year of the collateral, subordination levels within the structure of the collateral pool, expected future cash flows, and the Companys ability and intent to hold the security to recovery. These same factors also affect the
estimated fair value of these securities.



In
general, recent market activity has negatively impacted the valuation of securities containing Alt-A and Sub-prime collateral, which are classifications of investments in which the Company invests. The Company considers Alt-A collateral to be
mortgages whose underwriting standards do not qualify the mortgage for regular conforming or jumbo loan programs. Typical underwriting characteristics that cause a mortgage to fall into the Alt-A classification may include, but are not limited to,
inadequate loan documentation of a borrowers financial information, debt-to-income ratios above normal lending limits, loan-to-value ratios above normal lending limits that do not have primary mortgage insurance, a borrower who is a temporary
resident, and loans securing non-conforming types of real estate. Alt-A mortgages are generally issued to borrowers having higher Fair Isaac Credit Organization (FICO) scores, and the lender typically issues a slightly higher interest rate for such
mortgages. In addition, the Company considers Sub-prime collateral to be mortgages that are first-lien mortgage loans issued to Sub-prime borrowers, as demonstrated by recent delinquent rent or housing payments or substandard FICO scores.
Second-lien mortgage loans are also considered Sub-prime.



The estimated fair values of the Companys holdings of Alt A and Sub-prime collateralized mortgages are determined under the same processes as other fixed maturity securities (see Note 2(b) included in the F
pages of this report for further information).



The Companys investments in securities that contain Alt-A and Sub-prime collateral are predominantly highly rated. As of December 31, 2007, 100.0% and 95.2% of securities containing Alt-A and Sub-prime collateral, respectively,
were rated AA or better. In addition, 55.2% and 71.2% of Alt-A and Sub-prime collateral, respectively, was originated in 2005 or earlier.



The following tables summarize the distribution by collateral classification, rating and origination year, respectively, of the
Companys general account mortgage-backed and asset-backed securities as of December 31, 2007:



|                        |  |                   |  |                     |          |                              |      
|----------------------- |  | ----------------- |  | ------------------- | -------- | ---------------------------- | -----
|(dollars in millions)   |  | Amortized    cost |  | Estimatedfair value |          | % ofestimatedfair
valuetotal
|Government agency       |  | $ 3,515.4         |  | $                   | 3,524.7  |                              | 32.4 
|Prime                   |  | 1,573.2           |  |                     | 1,541.6  |                              | 14.2 
|Alt-A                   |  | 2,279.3           |  |                     | 2,230.3  |                              | 20.5 
|Sub-prime               |  | 864.4             |  |                     | 809.3    |                              | 7.4  
|Non-mortgage collateral |  | 2,867.3           |  |                     | 2,774.7  |                              | 25.5 
|                        |  |                   |  |                     |          |                              |      
|Total                   |  | $11,099.6         |  | $                   | 10,880.6 |                              | 100.0
|                        |  |                   |  |                     |          |                              |      



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|                      |  |  |  |                |  |                     |         |                              |       |               |   |                     |  |                              |       |  |      
|--------------------- |  |  |  | -------------- |  | ------------------- | ------- | ---------------------------- | ----- | ------------- | - | ------------------- |  | ---------------------------- | ----- |  | -----
|                      |  |  |  | Alt-A          |  | Sub-prime          
|(dollars in millions) |  |  |  | Amortized cost |  | Estimatedfair value |         | % ofestimatedfair
valuetotal |       | Amortizedcost |   | Estimatedfair value |  | % ofestimatedfair
valuetotal
|AAA                   |  |  |  | $2,252.6       |  | $                   | 2,204.3 |                              | 98.8  |               | $ | 630.6               |  | $                            | 595.3 |  | 73.5 
|AA                    |  |  |  | 26.7           |  |                     | 26.0    |                              | 1.2   |               |   | 191.0               |  |                              | 175.3 |  | 21.7 
|A                     |  |  |  |               |  |                     |        |                              |      |               |   | 33.9                |  |                              | 30.5  |  | 3.8  
|BBB                   |  |  |  |               |  |                     |        |                              |      |               |   | 2.6                 |  |                              | 1.9   |  | 0.2  
|BB and below          |  |  |  |               |  |                     |        |                              |      |               |   | 6.3                 |  |                              | 6.3   |  | 0.8  
|                      |  |  |  |                |  |                     |         |                              |       |               |   |                     |  |                              |       |  |      
|Total                 |  |  |  | $2,279.3       |  | $                   | 2,230.3 |                              | 100.0 |               | $ | 864.4               |  | $                            | 809.3 |  | 100.0
|                      |  |  |  |                |  |                     |         |                              |       |               |   |                     |  |                              |       |  |      
|                      |  |  | 
|                      |  |  |  | Alt-A          |  | Sub-prime          
|(dollars in millions) |  |  |  | Amortized cost |  | Estimatedfair value |         | % ofestimatedfair
valuetotal |       | Amortizedcost |   | Estimatedfair value |  | % ofestimatedfair
valuetotal
|Pre-2005              |  |  |  | $513.6         |  | $                   | 506.9   |                              | 22.7  |               | $ | 507.9               |  | $                            | 479.9 |  | 59.4 
|2005                  |  |  |  | 752.6          |  |                     | 724.4   |                              | 32.5  |               |   | 97.7                |  |                              | 95.7  |  | 11.8 
|2006                  |  |  |  | 562.2          |  |                     | 553.5   |                              | 24.8  |               |   | 219.8               |  |                              | 198.6 |  | 24.5 
|2007                  |  |  |  | 450.9          |  |                     | 445.5   |                              | 20.0  |               |   | 39.0                |  |                              | 35.1  |  | 4.3  
|                      |  |  |  |                |  |                     |         |                              |       |               |   |                     |  |                              |       |  |      
|Total                 |  |  |  | $2,279.3       |  | $                   | 2,230.3 |                              | 100.0 |               | $ | 864.4               |  | $                            | 809.3 |  | 100.0
|                      |  |  |  |                |  |                     |         |                              |       |               |   |                     |  |                              |       |  |      



Private Placement
Fixed Maturity Securities



The Company
invests in private placement fixed maturity securities because of the generally higher nominal yield available compared to comparably rated public fixed maturity securities, more restrictive financial and business covenants available in private
fixed maturity security loan agreements, and stronger prepayment protection. Although private placement fixed maturity securities are not registered with the SEC and generally are less liquid than public fixed maturity securities, restrictive
financial and business covenants included in private placement fixed maturity security loan agreements generally are designed to compensate for the impact of increased liquidity risk. A significant portion of the private placement fixed maturity
securities that the Company holds are participations in issues that are also owned by other investors. In addition, some of these securities are rated by nationally recognized rating agencies, and substantially all have been assigned a rating
designation by the NAIC, as shown in the earlier table summarizing the credit quality of the Companys general account fixed maturity securities portfolio.



Mortgage Loans



As of December 31, 2007, general account mortgage loans were $8.32 billion (21%) of the carrying value of consolidated general
account investments compared to $8.91 billion (22%) as of December 31, 2006. Substantially all of these loans were commercial mortgage loans. Commitments to fund mortgage loans of $85.1 million were outstanding as of December 31, 2007
compared to $139.5 million as of December 31, 2006.



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The table below summarizes the carrying values of mortgage loans by regional exposure and
property type as of December 31, 2007:



|                                                                         |  |        |         |           |   |         |  |                  |         |       |   |         |  |   |         |  
|------------------------------------------------------------------------ |  | ------ | ------- | --------- | - | ------- |  | ---------------- | ------- | ----- | - | ------- |  | - | ------- | -
|(in millions)                                                            |  | Office |         | Warehouse |   | Retail  |  | Apartment& Other |         | Total |  
|New England                                                              |  | $      | 141.1   |           | $ | 27.1    |  | $                | 78.3    |       | $ | 92.5    |  | $ | 339.0   |  
|Middle Atlantic                                                          |  |        | 172.9   |           |   | 278.0   |  |                  | 355.5   |       |   | 164.0   |  |   | 970.4   |  
|East North Central                                                       |  |        | 91.2    |           |   | 239.2   |  |                  | 555.8   |       |   | 491.7   |  |   | 1,377.9 |  
|West North Central                                                       |  |        | 34.9    |           |   | 70.7    |  |                  | 77.0    |       |   | 152.3   |  |   | 334.9   |  
|South Atlantic                                                           |  |        | 155.9   |           |   | 494.1   |  |                  | 737.1   |       |   | 562.4   |  |   | 1,949.5 |  
|East South Central                                                       |  |        | 25.8    |           |   | 45.0    |  |                  | 122.0   |       |   | 154.0   |  |   | 346.8   |  
|West South Central                                                       |  |        | 22.8    |           |   | 170.1   |  |                  | 179.7   |       |   | 242.4   |  |   | 615.0   |  
|Mountain                                                                 |  |        | 123.0   |           |   | 138.1   |  |                  | 168.4   |       |   | 359.4   |  |   | 788.9   |  
|Pacific                                                                  |  |        | 333.0   |           |   | 434.5   |  |                  | 438.6   |       |   | 386.2   |  |   | 1,592.3 |  
|                                                                         |  |        |         |           |   |         |  |                  |         |       |   |         |  |   |         |  
|Total principal                                                          |  | $      | 1,100.6 |           | $ | 1,896.8 |  | $                | 2,712.4 |       | $ | 2,604.9 |  |   | 8,314.7 |  
|                                                                         |  |        |         |           |   |         |  |                  |         |       |   |         |  |   |         |  
|Valuation allowance                                                      |  |        |         |           |   |         |  |                  |         |       |   |         |  |   | (24.8   | )
|Unamortized premium                                                      |  |        |         |           |   |         |  |                  |         |       |   |         |  |   | 12.9    |  
|Lower of cost or market adjustment on mortgage loans held for sale       |  |        |         |           |   |         |  |                  |         |       |   |         |  |   | (3.8    | )
|Cumulative change in fair value of hedged mortgage loans and commitments |  |        |         |           |   |         |  |                  |         |       |   |         |  |   | 17.1    |  
|                                                                         |  |        |         |           |   |         |  |                  |         |       |   |         |  |   |         |  
|Total mortgage loans on real estate, net                                 |  |        |         |           |   |         |  |                  |         |       |   |         |  | $ | 8,316.1 |  
|                                                                         |  |        |         |           |   |         |  |                  |         |       |   |         |  |   |         |  



As of
December 31, 2007, the Companys largest exposure to any single borrower, region and property type was 2%, 23% and 33%, respectively, of the Companys general account mortgage loan portfolio, compared to 3%, 25% and 34%, respectively,
as of December 31, 2006.



As of
December 31, 2007 and 2006, the Companys mortgage loans classified as delinquent, foreclosed and restructured were immaterial as a percentage of the total mortgage loan portfolio.



Securities Lending



The Company, through an agent, lends certain portfolio
holdings and in turn receives cash collateral with the objective of increasing the yield on its investments. The cash collateral is invested in high-quality, short-term investments. The Companys policy requires the maintenance of collateral of
a minimum of 102% of the fair value of the securities loaned. Net returns on the investments, after payment of a rebate to the borrower, are shared between the Company and the agent. Both the borrower and the Company can request or return the loaned
securities at any time. The Company maintains ownership of the loaned securities at all times and is entitled to receive from the borrower any payments for interest or dividends received on such securities during the loan term. The Company
recognizes loaned securities as part of its investments available-for-sale. The Company recognizes the short-term investments acquired with the cash collateral and its obligation to return such collateral to the borrower in short-term investments
and other liabilities, respectively.



As of
December 31, 2007 and 2006, the Company had received $604.6 million and $886.7 million, respectively, of cash collateral on securities lending. The Company had not received any non-cash collateral on securities lending as of December 31,
2007 and 2006. As of December 31, 2007 and 2006, the Company had loaned securities with a fair value of $593.0 million and $859.9 million, respectively.



Counterparty Risk Associated with Derivatives



Credit risk associated with derivatives is measured as the net replacement cost in the event the counterparties with contracts in a gain
position relative to the Company fail to perform under the terms of those



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contracts. The Companys derivative activities primarily are with financial institutions and corporations. To attempt to minimize credit risk, the
Company enters into legally enforceable master netting agreements, which reduce risk by permitting the closeout and netting of transactions with the same counterparty upon occurrence of certain events. In addition, the Company attempts to reduce
credit risk by obtaining collateral from counterparties. The determination of the need for and the levels of collateral varies based on an assessment of the credit risk of the counterparty. Generally, the Company accepts collateral in the form of
cash, U.S. Treasury securities and other marketable securities.



As of December 31, 2007 and 2006, the Company had received $245.4 million and $171.0 million, respectively, of cash for derivative collateral. The Company also held $18.5 million and $12.8 million of securities
as off-balance sheet collateral on derivative transactions as of December 31, 2007 and 2006, respectively. As of December 31, 2007, the Company had pledged fixed maturity securities with a fair value of $18.8 million as collateral to
various derivative counterparties compared to none as of December 31, 2006.



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ITEM 7A    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Market Risk Sensitive Financial Instruments



The Company is subject to potential fluctuations in earnings and the fair value of certain of its assets and liabilities, as well as
variations in expected cash flows due to changes in market interest rates and equity prices. The following discussion focuses on specific interest rate, foreign currency and equity market risks to which the Company is exposed and describes
strategies used to attempt to manage these risks. This discussion is limited to financial instruments subject to market risks and is not intended to be a complete discussion of all of the risks to which the Company is exposed.



Interest Rate Risk



Fluctuations in interest rates can impact the Companys
earnings, cash flows and the fair value of its assets and liabilities. In a declining interest rate environment, the Company may be required to reinvest the proceeds from maturing and prepaying investments at rates lower than the overall portfolio
yield, which could reduce future interest spread income. In addition, minimum guaranteed crediting rates (ranging from 1.5% to 3.5% for a majority of the individual annuity contracts in force) on certain individual annuity contracts could prevent
the Company from lowering its interest crediting rates to levels commensurate with prevailing market interest rates, resulting in a reduction to the Companys interest spread income. The average crediting rate for fixed annuity products during
2007 was 3.76% and 3.98% for the Individual Investments and Retirement Plans segments, respectively (compared to 3.76% and 4.07%, respectively, during 2006), well in excess of guaranteed rates.



The Company attempts to mitigate this risk by managing the
maturity and interest-rate sensitivities of assets to be consistent with those of liabilities. In recent years, management has taken actions to address low interest rate environments and the resulting impact on interest spread margins, including
reducing commissions on fixed annuity sales, launching new products with new guaranteed rates, discontinuing the sale of its leading annual reset fixed annuities and invoking contractual provisions that limit the amount of variable annuity deposits
allocated to the guaranteed fixed option. In addition, the Company adheres to a strict discipline of setting interest crediting rates on new business at levels adequate to provide returns consistent with management expectations.



Conversely, a rising interest rate environment could result
in a reduction in interest spread income or an increase in policyholder surrenders. Existing general account investments supporting annuity liabilities had a weighted average maturity of approximately 5.8 years as of December 31, 2007.
Therefore, a change in portfolio yield will lag changes in market interest rates. This lag increases if the rate of prepayments of securities slows. To the extent the Company sets renewal rates based on current market rates, this will result in
reduced interest spreads. Alternatively, if the Company sets renewal crediting rates while attempting to maintain a desired spread from the portfolio yield, the rates offered by the Company may be less than new money rates offered by competitors.
This difference could result in an increase in surrender activity by policyholders. If unable to fund surrenders with cash flow from operations, the Company might need to sell assets, which likely would have declined in value due to the increase in
interest rates. The Company attempts to mitigate this risk by offering products that assess surrender charges and/or market value adjustments at the time of surrender, and by managing the maturity and interest-rate sensitivities of assets to
approximate those of liabilities.



Asset/Liability
Management Strategies to Manage Interest Rate Risk



The Company employs an asset/liability management approach tailored to the specific requirements of each of its products. Each line of business has an investment policy based on its specific characteristics. The policy establishes asset
maturity and duration, quality and other relevant guidelines.



An underlying pool or pools of investments, including combinations of dedicated and common asset pools, support each general account line of business. Dedicated pools of assets have been created for certain
liabilities or groups of liabilities within most lines and represent the majority of the pools. These pools consist of whole



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assets purchased specifically for the underlying line of business. In general, assets placed in any given portfolio remain there until they mature (or are
called), but active management of specific securities, sectors and several top-down risks may result in portfolio turnover or transfers among the various portfolios. The common asset pools are generally maintained on the basis of the desired
maturity characteristics of the assets used (e.g., 4 to 7 years weighted average life). The various lines of business are given ownership percentages of assets acquired by the pools depending on their contribution to the amounts
purchased in the pools, in a manner analogous to investment year allocations. This methodology is sometimes referred to as synthetic segmentation.



Investment strategies are executed by dedicated investment professionals based on the guidance established for the various pools. To
assist them in this regard, they receive periodic projections of investment needs from each lines management team. Line of business management teams, investment portfolio managers and finance professionals periodically evaluate how well assets
purchased and the underlying portfolio match the underlying liabilities for each line.



Using this information, in conjunction with each lines investment strategy, actual asset purchases or commitments are made. In addition, plans for future asset purchases are formulated when
appropriate. This process is repeated frequently so that invested assets for each line match its investment needs as closely as possible. The primary objectives are to ensure that each lines liabilities are invested in accordance with its
investment strategy and that over or under investment is minimized.



As part of this process, the investment portfolio managers provide each lines actuaries with forecasts of anticipated rates that the lines future investments are expected to produce. This information, in
combination with yields attributable to the lines current investments and its investment rollovers, gives the line actuaries data to use in computing and declaring interest crediting rates for their lines of business in conjunction
with management approval.



There are two
approaches to developing investment policies:



| |  |  | For liabilities where cash flows are not interest sensitive and the credited rate is fixed (e.g., immediate annuities), the Company attempts to manage risk with
a combination cash matching/duration matching strategy. Duration is a measure of the sensitivity of price to changes in interest rates. For a rate movement of 100 basis points, the fair value of liabilities with a duration of 5 years would change by
approximately 5%. For this type of liability, the Company generally targets an asset/liability duration mismatch of -0.25 to +0.50 years. In addition, the Company attempts to minimize asset and liability cash flow mismatches, especially over the
first five years. However, the desired degree of cash matching is balanced against the cost of cash matching.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For liabilities where the Company has the right to modify the credited rate and policyholders also have options, the Companys risk management process
includes modeling both the assets and liabilities over multiple stochastic scenarios. The Company considers a range of potential policyholder behavior as well as the specific liability crediting strategy. This analysis, combined with appropriate
risk tolerances, drives the Companys investment policy.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Use of Derivatives to Manage Interest Rate Risk



The Company periodically purchases fixed rate investments to back variable rate liabilities. As a result, the Company can be exposed to interest rate risk due to the mismatch between variable
rate liabilities and fixed rate assets. In an effort to mitigate the risk from this mismatch, the Company enters into various types of derivative instruments, with fluctuations in the fair values of the derivatives offsetting changes in the fair
values of the investments resulting from changes in interest rates. The Company principally uses pay fixed/receive variable interest rate swaps to manage this risk.



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Under these interest rate swaps, the Company receives variable interest rate payments and
makes fixed rate payments. The fixed interest paid on the swap offsets the fixed interest received on the investment, resulting in the Company receiving the variable interest payments on the swap, generally 3-month U.S. LIBOR, and the credit spread
on the investment. The net receipt of a variable rate will then more closely match the variable rate paid on the liability.



As a result of entering into commercial mortgage loan and private placement commitments, the Company is exposed to changes in the fair
value of such commitments due to changes in interest rates during the commitment period prior to funding of the loans. In an effort to manage this risk, the Company enters into short U.S. Treasury futures and/or pay fixed interest rate swaps during
the commitment period. With short U.S. Treasury futures or pay fixed interest rate swaps, if interest rates rise/fall, the gains/losses on the futures will offset the change in fair value of the commitment attributable to the change in interest
rates.



The Company periodically purchases
variable rate investments such as commercial mortgage loans and corporate bonds. As a result, the Company can be exposed to variability in cash flows and investment income due to changes in interest rates. Such variability poses risks to the Company
when the assets are funded with fixed rate liabilities. In an effort to manage this risk, the Company may enter into receive fixed/pay variable interest rate swaps.



In using these interest rate swaps, the Company receives fixed interest rate payments and makes variable
rate payments. The variable interest paid on the swap offsets the variable interest received on the investment, resulting in the Company receiving the fixed interest payments on the swap and the credit spread on the investment. The net receipt of a
fixed rate will then more closely match the fixed rate paid on the liability.



The Company manages interest rate risk at the segment level. Different segments may simultaneously hedge interest rate risks associated with owning fixed and variable rate investments considering the risk relevant to
a particular segment.



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Characteristics of Interest Rate Sensitive Financial Instruments



The table below provides information about the
Companys financial instruments as of December 31, 2007 that are sensitive to changes in interest rates. Insurance contracts that subject the Company to significant mortality risk, including life insurance contracts and life-contingent
immediate annuities, do not meet the definition of a financial instrument and are not included in the table.



|                                            |  |                                         |         |               |   |               |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|------------------------------------------- |  | --------------------------------------- | ------- | ------------- | - | ------------- |  | ---- | ------- | ---- | - | ----------- |  | ----- | ------- |  | - | ------- |  | - | -------- |  | - | -------- |  | - | --------
|                                            |  | Estimated year of maturities/repayments |         | 2007FairValue |   | 2006FairValue
|(in millions)                               |  | 2008                                    |         | 2009          |   | 2010          |  | 2011 |         | 2012 |   | There-after |  | Total |         | 
|Assets                                      |  |                                         |         |               |   |               |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Fixed maturity securities:                  |  |                                         |         |               |   |               |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Corporate bonds:                            |  |                                         |         |               |   |               |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       | 1,993.0 |               | $ | 1,749.6       |  | $    | 1,990.3 |      | $ | 2,066.8     |  | $     | 1,825.8 |  | $ | 5,618.4 |  | $ | 15,243.9 |  | $ | 15,309.1 |  | $ | 16,478.2
|Weighted average interest rate              |  |                                         | 5.83%   |               |   | 6.33%         |  |      | 6.06%   |      |   | 6.02%       |  |       | 5.88%   |  |   | 6.48%   |  |   | 6.19%    |  |   |          |  |   |         
|Mortgage and other asset-backed securities: |  |                                         |         |               |   |               |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       | 1,577.7 |               | $ | 1,184.0       |  | $    | 1,294.7 |      | $ | 1,180.0     |  | $     | 1,120.8 |  | $ | 4,742.4 |  | $ | 11,099.6 |  | $ | 10,880.6 |  | $ | 10,578.6
|Weighted average interest rate              |  |                                         | 5.54%   |               |   | 5.65%         |  |      | 5.55%   |      |   | 5.63%       |  |       | 5.55%   |  |   | 5.69%   |  |   | 5.63%    |  |   |          |  |   |         
|Other fixed maturity securities:            |  |                                         |         |               |   |               |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       | 88.1    |               | $ | 46.0          |  | $    | 42.6    |      | $ | 36.4        |  | $     | 66.9    |  | $ | 640.4   |  | $ | 920.4    |  | $ | 999.5    |  | $ | 1,103.2 
|Weighted average interest rate              |  |                                         | 5.05%   |               |   | 6.05%         |  |      | 5.05%   |      |   | 4.74%       |  |       | 5.58%   |  |   | 6.42%   |  |   | 6.08%    |  |   |          |  |   |         
|Mortgage loans on real estate:              |  |                                         |         |               |   |               |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       | 228.7   |               | $ | 232.9         |  | $    | 444.6   |      | $ | 906.1       |  | $     | 699.9   |  | $ | 5,782.6 |  | $ | 8,294.8  |  | $ | 8,335.7  |  | $ | 8,821.5 
|Weighted average interest rate              |  |                                         | 5.85%   |               |   | 6.10%         |  |      | 6.62%   |      |   | 6.40%       |  |       | 6.26%   |  |   | 6.02%   |  |   | 6.11%    |  |   |          |  |   |         
|Liabilities                                 |  |                                         |         |               |   |               |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Individual deferred fixed annuities:        |  |                                         |         |               |   |               |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       | 2,043.2 |               | $ | 1,557.9       |  | $    | 1,246.4 |      | $ | 990.7       |  | $     | 811.8   |  | $ | 2,589.4 |  | $ | 9,239.4  |  | $ | 7,644.4  |  | $ | 10,070.1
|Weighted average crediting rate             |  |                                         | 3.23%   |               |   | 3.28%         |  |      | 3.39%   |      |   | 3.50%       |  |       | 3.53%   |  |   | 3.55%   |  |   |          |  |   |          |  |   |         
|Group pension deferred fixed annuities:     |  |                                         |         |               |   |               |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       | 1,277.2 |               | $ | 1,166.2       |  | $    | 1,147.9 |      | $ | 990.4       |  | $     | 847.2   |  | $ | 5,544.2 |  | $ | 10,973.1 |  | $ | 11,190.5 |  | $ | 11,353.5
|Weighted average crediting rate             |  |                                         | 4.11%   |               |   | 4.11%         |  |      | 4.11%   |      |   | 4.12%       |  |       | 4.13%   |  |   | 4.14%   |  |   |          |  |   |          |  |   |         
|Funding agreements backing MTNs:            |  |                                         |         |               |   |               |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       | 801.5   |               | $ | 1,304.0       |  | $    | 1,142.4 |      | $ | 784.6       |  | $     | 677.4   |  | $ |        |  | $ | 4,709.9  |  | $ | 4,537.5  |  | $ | 4,611.8 
|Weighted average crediting rate             |  |                                         | 4.71%   |               |   | 4.27%         |  |      | 4.17%   |      |   | 4.21%       |  |       | 4.07%   |  |   |        |  |   |          |  |   |          |  |   |         
|Immediate annuities:                        |  |                                         |         |               |   |               |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       | 267.9   |               | $ | 239.1         |  | $    | 204.9   |      | $ | 176.7       |  | $     | 150.8   |  | $ | 932.4   |  | $ | 1,971.8  |  | $ | 565.2    |  | $ | 491.6   
|Weighted average crediting rate             |  |                                         | 6.55%   |               |   | 6.60%         |  |      | 6.65%   |      |   | 6.70%       |  |       | 6.75%   |  |   | 6.82%   |  |   |          |  |   |          |  |   |         
|Short-term debt:                            |  |                                         |         |               |   |               |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       | 309.3   |               | $ |              |  | $    |        |      | $ |            |  | $     |        |  | $ |        |  | $ | 309.3    |  | $ | 309.3    |  | $ | 85.2    
|Weighted average interest rate              |  |                                         | 4.66%   |               |   |              |  |      |        |      |   |            |  |       |        |  |   |        |  |   | 4.66%    |  |   |          |  |   |         
|Long-term debt:                             |  |                                         |         |               |   |               |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       |        |               | $ | 20.0          |  | $    |        |      | $ | 299.2       |  | $     | 314.2   |  | $ | 931.7   |  | $ | 1,565.1  |  | $ | 1,566.8  |  | $ | 1,437.5 
|Weighted average interest rate              |  |                                         |        |               |   | 3.56%         |  |      |        |      |   | 6.25%       |  |       | 5.82%   |  |   | 6.18%   |  |   | 6.09%    |  |   |          |  |   |         



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|                                              |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|--------------------------------------------- |  | --------------------------------------- | ------- | ------------- | - | ------- | ------------- | ---- | ------- | ---- | - | ----------- |  | ----- | ------- |  | - | ------- |  | - | ------- |  | - | ------ | - |  | - | ----- | -
|                                              |  | Estimated year of maturities/repayments |         | 2007FairValue |   |         | 2006FairValue |     
|(in millions, except settlement prices)       |  | 2008                                    |         | 2009          |   | 2010    |               | 2011 |         | 2012 |   | There-after |  | Total |         | 
|Derivative Financial Instruments              |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Interest rate swaps:                          |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Pay fixed/receive variable:                   |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Notional value                                |  | $                                       | 471.4   |               | $ | 789.7   |               | $    | 463.8   |      | $ | 875.0       |  | $     | 348.6   |  | $ | 265.8   |  | $ | 3,214.3 |  | $ | (163.6 | ) |  | $ | (95.4 | )
|Weighted average pay rate                     |  |                                         | 4.85%   |               |   | 3.68%   |               |      | 5.02%   |      |   | 5.03%       |  |       | 5.17%   |  |   | 5.23%   |  |   | 4.70%   |  |   |        |   |  |   |       |  
|Weighted average receive rate1                |  |                                         | 5.40%   |               |   | 5.37%   |               |      | 5.37%   |      |   | 5.43%       |  |       | 5.51%   |  |   | 5.44%   |  |   | 5.41%   |  |   |        |   |  |   |       |  
|Pay fixed/receive variable, forward starting: |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Notional value                                |  | $                                       |        |               | $ |        |               | $    |        |      | $ |            |  | $     |        |  | $ | 98.6    |  | $ | 98.6    |  | $ | (3.7   | ) |  | $ | (0.8  | )
|Weighted average pay rate                     |  |                                         |        |               |   |        |               |      |        |      |   |            |  |       |        |  |   | 5.18%   |  |   | 5.18%   |  |   |        |   |  |   |       |  
|Weighted average receive rate                 |  |                                         |        |               |   |        |               |      |        |      |   |            |  |       |        |  |   | 1.75%   |  |   | 1.75%   |  |   |        |   |  |   |       |  
|Pay variable/receive fixed:                   |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Notional value                                |  | $                                       | 228.8   |               | $ | 15.9    |               | $    | 11.4    |      | $ | 266.6       |  | $     | 223.4   |  | $ | 338.9   |  | $ | 1,085.0 |  | $ | 246.6  |   |  | $ | 214.1 |  
|Weighted average pay rate1                    |  |                                         | 2.79%   |               |   | 4.98%   |               |      | 5.98%   |      |   | 5.28%       |  |       | 5.50%   |  |   | 4.98%   |  |   | 4.71%   |  |   |        |   |  |   |       |  
|Weighted average receive rate                 |  |                                         | 2.53%   |               |   | 4.17%   |               |      | 8.52%   |      |   | 6.25%       |  |       | 5.44%   |  |   | 5.08%   |  |   | 4.93%   |  |   |        |   |  |   |       |  
|Pay fixed/receive fixed:                      |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Notional value                                |  | $                                       | 16.8    |               | $ | 64.1    |               | $    | 51.8    |      | $ | 67.8        |  | $     | 11.4    |  | $ | 124.1   |  | $ | 336.0   |  | $ | (24.4  | ) |  | $ | (46.4 | )
|Weighted average pay rate                     |  |                                         | 5.83%   |               |   | 5.73%   |               |      | 3.66%   |      |   | 5.61%       |  |       | 4.70%   |  |   | 5.14%   |  |   | 5.14%   |  |   |        |   |  |   |       |  
|Weighted average receive rate                 |  |                                         | 4.04%   |               |   | 4.16%   |               |      | 4.66%   |      |   | 5.12%       |  |       | 6.10%   |  |   | 5.73%   |  |   | 5.07%   |  |   |        |   |  |   |       |  
|Credit default swaps sold:                    |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Notional value                                |  | $                                       | 115.0   |               | $ | 29.5    |               | $    | 57.0    |      | $ | 6.0         |  | $     | 48.0    |  | $ |        |  | $ | 255.5   |  | $ | (8.5   | ) |  | $ | 2.5   |  
|Weighted average receive rate                 |  |                                         | 0.57%   |               |   | 0.99%   |               |      | 0.66%   |      |   | 3.55%       |  |       | 0.92%   |  |   |        |  |   | 0.78%   |  |   |        |   |  |   |       |  
|Credit default swaps purchased:               |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Notional value                                |  | $                                       | 11.5    |               | $ | 0.8     |               | $    |        |      | $ | 10.5        |  | $     |        |  | $ | 22.0    |  | $ | 44.8    |  | $ | 3.2    |   |  | $ | (0.2  | )
|Weighted average pay rate                     |  |                                         | 1.10%   |               |   | 5.00%   |               |      |        |      |   | 0.89%       |  |       |        |  |   | 0.57%   |  |   | 0.85%   |  |   |        |   |  |   |       |  
|Embedded derivatives:                         |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Notional value                                |  | $                                       |        |               | $ |        |               | $    |        |      | $ |            |  | $     |        |  | $ | 20.0    |  | $ | 20.0    |  | $ | (122.0 | ) |  | $ | 54.5  |  
|Total return swaps2:                          |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Notional value                                |  | $                                       | 375.0   |               | $ |        |               | $    |        |      | $ |            |  | $     |        |  | $ |        |  | $ | 375.0   |  | $ | (3.3   | ) |  | $ | 0.1   |  
|Mortgage loan commitments held for sale:      |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Notional value                                |  | $                                       | 86.5    |               | $ |        |               | $    |        |      | $ |            |  | $     |        |  | $ |        |  | $ | 86.5    |  | $ | (0.8   | ) |  | $ |      |  
|Treasury futures:                             |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Short positions:                              |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Contract amount/notional value                |  | $                                       | 3.0     |               | $ |        |               | $    |        |      | $ |            |  | $     |        |  | $ |        |  | $ | 3.0     |  | $ |       |   |  | $ |      |  
|Weighted average settlement price             |  |                                         | 111.4   |               |   |        |               |      |        |      |   |            |  |       |        |  |   |        |  |   | 111.4   |  |   |        |   |  |   |       |  
|Long positions:                               |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Contract amount/notional value                |  | $                                       | 197.5   |               | $ |        |               | $    |        |      | $ |            |  | $     |        |  | $ |        |  | $ | 197.5   |  | $ | 0.9    |   |  | $ | (2.1  | )
|Weighted average settlement price             |  |                                         | 112.9   |               |   |        |               |      |        |      |   |            |  |       |        |  |   |        |  |   | 112.9   |  |   |        |   |  |   |       |  
|Equity futures:                               |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Short positions:                              |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Contract amount/notional value                |  | $                                       | 286.7   |               | $ |        |               | $    |        |      | $ |            |  | $     |        |  | $ |        |  | $ | 286.7   |  | $ | 4.5    |   |  | $ | (0.2  | )
|Weighted average settlement price             |  |                                         | 1,492.8 |               |   |        |               |      |        |      |   |            |  |       |        |  |   |        |  |   | 1,492.8 |  |   |        |   |  |   |       |  
|Long positions:                               |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Contract amount/notional value                |  | $                                       | 0.6     |               | $ |        |               | $    |        |      | $ |            |  | $     |        |  | $ |        |  | $ | 0.6     |  | $ |       |   |  | $ |      |  
|Weighted average settlement price             |  |                                         | 1,480.6 |               |   |        |               |      |        |      |   |            |  |       |        |  |   |        |  |   | 1,480.6 |  |   |        |   |  |   |       |  
|Option contracts                              |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Long positions:                               |  |                                         |         |               |   |         |               |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |        |   |  |   |       |  
|Contract amount/notional value                |  | $                                       | 179.4   |               | $ | 97.2    |               | $    | 230.4   |      | $ | 653.6       |  | $     | 420.5   |  | $ | 664.2   |  | $ | 2,245.3 |  | $ | 147.4  |   |  | $ | 70.0  |  
|Weighted average settlement price             |  |                                         | 1,499.1 |               |   | 1,068.5 |               |      | 1,124.7 |      |   | 1,198.0     |  |       | 1,260.4 |  |   | 1,283.4 |  |   | 1,245.9 |  |   |        |   |  |   |       |  



|1 | Variable rates are generally based on 1, 3 or 6-month U.S. LIBOR and reflect the effective rate as of
December 31, 2007.
|- | ------------------------------------------------------------------------------------------------------------------------

|2 | Total return swaps are based on the Lehman CMBS Index.
|- | ------------------------------------------------------



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Additional information about the characteristics of the financial instruments and
assumptions underlying the data presented in the table above are as follows:



Mortgage-backed and other asset-backed securities: The year of maturity is determined based on the terms of the securities and the current rate of prepayment of the underlying pools of mortgages or assets. The
Company limits its exposure to prepayments by purchasing less volatile types of MBS and ABS investments. See Part II, Item 7MD&AInvestmentsSecurities Available-for-Salefor further information.



Corporate bonds and other fixed maturity securities and
mortgage loans on real estate: The maturity year is that of the security or loan.



Individual deferred fixed annuities: The maturity year is based on the expected date of policyholder withdrawal, taking into account actual experience, current interest rates and contract
terms. Individual deferred fixed annuities are certain individual annuity contracts, which are also subject to surrender charges calculated as a percentage of the deposits made and assessed at declining rates during the first seven years after a
deposit is made. Also included in deferred fixed annuities were $1.27 billion of participating group annuity contracts in 2007 ($1.27 billion in 2006). As of December 31, 2007, individual annuity general account liabilities totaling $3.95
billion ($5.12 billion in 2006) were in contracts where the crediting rate is reset periodically, with portions resetting in each calendar quarter, and $656.6 million that reset annually in 2007 compared to $795.9 million in 2006. Individual fixed
annuity policy reserves of $1.47 billion in 2007 ($2.29 billion in 2006) were in contracts that adjust the crediting rate every five years. Individual fixed annuity policy reserves of $620.3 million in 2007 were in contracts that adjust the
crediting rate every three years compared to $684.0 million in 2006. The average crediting rate is calculated as the difference between the projected yield of the assets backing the liabilities and a targeted interest spread. However, for certain
individual annuities the crediting rate is also adjusted to partially reflect current new money rates.



Group pension deferred fixed annuities: The maturity year is based on the expected date of policyholder withdrawal, taking into
account actual experience, current interest rates and contract terms. Included were group annuity contracts representing $10.97 billion and $11.13 billion of general account liabilities as of December 31, 2007 and 2006, respectively, which are
generally subject to market value adjustment upon surrender and which also may be subject to surrender charges. Of the total group annuity liabilities, $26.1 million ($6.4 million in 2006) were in contracts where the crediting rate is reset monthly,
$9.70 billion ($9.76 billion in 2006) were in contracts where the crediting rate is reset quarterly, $518.0 million ($484.6 million in 2006) were in contracts that adjust the crediting rate on an annual basis with portions resetting in each calendar
quarter, and $725.1 million ($905.6 million in 2006) were in contracts where the crediting rate is reset annually on January 1.



Funding agreements backing MTNs: As of December 31, 2007 and 2006, fixed annuity policy reserves of $4.53 billion and $4.60
billion, respectively, relate to funding agreements issued in conjunction with the Companys MTN program where the crediting rate either is fixed for the term of the contract or is variable based on an underlying index.



Immediate annuities: Non-life contingent contracts in
payout status where the Company has guaranteed periodic payments, typically monthly, are included. The maturity year is based on the terms of the contract.



Short-term debt and long-term debt: The maturity year is the stated maturity date of the obligation. While certain obligations are
callable, either at a premium or with a make-whole provision, the Company currently has no plans to call the obligations prior to the stated maturity date.



Derivative financial instruments:The maturity year is based on the terms of the related contract. Interest rate swaps include
cross-currency interest rate swaps, which are used to reduce the Companys existing asset and liability foreign currency exposure. Cross-currency interest rate swaps in place against each foreign currency obligation hedge the Company against
adverse currency movements with respect to both period interest payments and principal repayment. Underlying details by currency therefore have been omitted. Variable swap rates and settlement prices reflect rates and prices in effect as of
December 31, 2007.



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Foreign Currency Risk Management



In conjunction with the Companys MTN program, the Company periodically issues both fixed and variable
rate liabilities denominated in foreign currencies. As a result, the Company is exposed to changes in the fair value of liabilities due to changes in foreign currency exchange rates and related interest rates. In an effort to manage these risks, the
Company enters into cross-currency interest rate swaps.



The Company is exposed to changes in the fair value of fixed rate investments denominated in a foreign currency due to changes in foreign currency exchange rates and related interest rates. In an effort to manage this risk, the Company uses
cross-currency interest rate hedges to swap these asset characteristics to variable U.S. dollar rate instruments. Cross-currency interest rate swaps on assets are structured to pay a fixed rate, in a foreign currency, and receive a variable U.S.
dollar rate, generally 3-month U.S. LIBOR. These derivative instruments are designated as a fair value hedge of a fixed rate foreign denominated asset.



Cross-currency interest rate swaps on variable rate investments are structured to pay a variable rate, in a foreign currency, and receive
a fixed U.S. dollar rate. The terms of the foreign currency paid on the swap will exactly match the terms of the foreign currency received on the asset, thus eliminating currency risk. These derivative instruments are designated as a cash flow
hedge.



Equity Market Risk



Asset fees calculated as a percentage of separate account
assets are a significant source of revenue to the Company. As of December 31, 2007, approximately 82% of separate account assets were invested in equity mutual funds (approximately 83% as of December 31, 2006). Gains and losses in the
equity markets result in corresponding increases and decreases in the Companys separate account assets and asset fee revenue. In addition, a decrease in separate account assets may decrease the Companys expectations of future profit
margins due to a decrease in asset fee revenue and/or an increase in guaranteed contract claims, which also may require the Company to accelerate amortization of DAC.



The Companys long-term assumption for net separate account returns is 7% annual growth. If equity
markets were unchanged throughout a given year, the Company estimates that its net earnings per diluted share, calculated using current weighted average diluted shares outstanding, would be approximately $0.05 to $0.10 less than if the
Companys long-term assumption for net separate account returns were realized. This analysis assumes no other factors change and that an unlocking of DAC assumptions would not be required. However, as it does each quarter, the Company would
evaluate its DAC balance and underlying assumptions to determine the need for unlocking. The Company can provide no assurance that the experience of flat equity market returns would not result in changes to other factors affecting profitability,
including the possibility of unlocking of DAC assumptions.



Many of the Companys individual variable annuity contracts offer GMDB features. A GMDB generally provides a benefit if the annuitant dies and the contract value is less than a specified amount, which may be
based on premiums paid less amounts withdrawn or contract value on a specified anniversary date. A decline in the stock market causing the contract value to fall below this specified amount, which varies from contract to contract based on the date
the contract was entered into as well as the GMDB feature elected, will increase the net amount at risk, which is the GMDB in excess of the contract value. This could result in additional GMDB claims.



In an effort to mitigate this risk, the Company implemented a
GMDB economic hedging program for certain new and existing business. Prior to implementation of the GMDB hedging program in 2000, the Company managed this risk primarily by entering into reinsurance arrangements. The GMDB economic hedging program is
designed to offset changes in the economic value of the designated GMDB. Currently the program shorts S&P 500 Index futures, which provides an offset to changes in the value of the designated obligation. The futures are



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not designated as hedges and, therefore, hedge accounting is not applied. The Companys economic and accounting hedges are not perfectly offset.
Therefore, the hedging activity is likely to lead to earnings volatility. This volatility was negligible in 2007. As of December 31, 2007 and 2006, the Companys net amount at risk was $528.0 million and $574.3 million before reinsurance,
respectively, and $319.3 million and $196.2 million net of reinsurance, respectively. As of December 31, 2007 and 2006, the Companys reserve for GMDB claims was $47.6 million and $29.6 million, respectively.



The Company also offers certain variable annuity products
with GMAB, GLWB and hybrid GMAB/GLWB riders (collectively referred to as living benefits). A GMAB provides the contractholder with a guaranteed return of premium, adjusted proportionately for withdrawals, after a specified time period (5, 7 or 10
years) selected by the contractholder at the time of issuance of a variable annuity contract. In some cases, the contractholder also has the option, after a specified time, to drop the rider and continue the variable annuity contract without the
GMAB. The design of the GMAB rider limits the risk to the Company in a variety of ways including asset allocation requirements, which serve to reduce the Companys potential exposure to underlying fund performance risks. Specifically, the terms
in the GMAB rider limit policyholder asset allocation by either (1) requiring partial allocation of assets to a guaranteed term option (a fixed rate investment option) and excluding certain funds that are highly volatile or difficult to hedge
or (2) requiring all assets be allocated to one of the approved asset allocation funds or models defined by the Company.



Beginning in March 2005, the Company began offering a hybrid GMAB/GLWB through its CPPLI contract rider. This living benefit combines a
GMAB feature in its first 5-10 years with a lifetime withdrawal benefit election at the end of the GMAB feature. Upon maturity of the GMAB, the contractholder can elect the lifetime withdrawal benefit, which would continue for the duration of the
insureds life; elect a new CPPLI rider; or drop the rider completely and continue the variable annuity contract without any rider. If the lifetime withdrawal benefit is elected and the insureds contract value is exhausted through such
withdrawals and market conditions, the Company will continue to fund future withdrawals at a pre-defined level until the insureds death. In some cases, the contractholder has the right to drop the GLWB portion of this rider or periodically
reset the guaranteed withdrawal basis to a higher level. This benefit requires a minimum allocation to guaranteed term options or adherence to limitations required by an approved asset allocation strategy as previously described above.



In March 2006, the Company added L.inc, a stand-alone
GLWB, to complement CPPLI in its product offerings. This rider is very similar to the hybrid benefit discussed above in that L.inc and CPPLI both have guaranteed withdrawal rates that increase based on the age at which the contractholder begins
taking income. The withdrawal rates are applied to a benefit base to determine the guaranteed lifetime income amount available to a contractholder. The benefit base is equal to the variable annuity premium at contract issuance and may increase as a
result of a ratchet feature that is driven by account performance and a roll-up feature that is driven by policy duration. Generally, the longer the contractholder waits before commencing withdrawals, the greater the guaranteed lifetime income. One
key difference between L.inc and CPPLI is that the charge associated with L.inc is assessed against the benefit base. This is a risk mitigation feature as it alleviates much of the uncertainty around account performance and customer withdrawal
patterns, both of which can lead to lower than expected revenue streams if the charge were assessed on account value. In June 2007, the Company added a feature to L.inc to allow for a lump settlement in lieu of lifetime withdrawals in certain
situations.



The Companys living benefit
riders represent an embedded derivative in a variable annuity contract that is required to be separated from, and valued apart from, the host variable annuity contract. The embedded derivatives are carried at fair value. Subsequent changes in the
fair value of the embedded derivatives are recognized in earnings as a component of net realized investment gains and losses. The fair value of the embedded derivatives is calculated based on a combination of capital market and actuarial
assumptions. Projections of cash flows inherent in the valuation of the embedded derivative incorporate numerous assumptions including, but not limited to, expectations of contractholder persistency, contractholder withdrawal patterns, risk neutral
market returns, correlations of market returns and market return volatility. As of December 31, 2007 and 2006, the net balance of the embedded derivatives for living benefits was a liability of $91.9 million and an asset of $23.7 million,
respectively.



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Similar to the Companys economic hedging for GMDBs, the living benefits features
are also being economically hedged. The primary risks being hedged are the exposures associated with declining equity market returns and downward interest rate movements. The Company employs a variety of instruments to mitigate this exposure
including S&P 500 Index futures, U.S. Treasury futures, interest rate swaps and long-dated over-the-counter put options. The positions used in the economic hedging program are not designated as hedges and, therefore, hedge accounting is not
applied. The living benefits hedging program is designed to offset changes in the economic value of the living benefits obligation to contractholders. Changes in the fair value of the embedded derivatives are likely to create volatility in earnings.
The hedging activity associated with changes in the economic value of the living benefits obligations will likely mitigate a portion of this earnings volatility.



Inflation



The rate of inflation did not have a material effect on the revenues or operating results of the Company during 2007, 2006 or 2005.



|ITEM 8 | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------ | --------------------------------------------------------



See Part IV, Item 15Exhibits, Financial Statement Schedulesfor an index to the Companys audited consolidated
financial statements included in the F pages of this report.



|ITEM 9 | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------ | ------------------------------------------------------------------------------------



None.



|ITEM 9A | CONTROLS AND PROCEDURES
|------- | -----------------------



Evaluation of Disclosure Controls and Procedures



The Companys Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Companys disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on such evaluation, such officers have concluded that the Companys disclosure controls and procedures are effective as of
the end of the period covered by this Annual Report.



Management Report
on Internal Control Over Financial Reporting



The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Companys
internal control system was designed to provide reasonable assurance to management and its Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the preparation and presentation of financial statements.



The Companys management assessed the effectiveness of
NFS internal control over financial reporting as of December 31, 2007. In making this assessment, the Companys management used the criteria set forth in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on those criteria, the Companys management concluded that NFS internal control over financial reporting was effective as of December 31, 2007.



The Companys independent registered public accounting
firm, KPMG LLP, issued an attestation report on the effectiveness of managements internal control over financial reporting. This report appears on page F-2.



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Changes in Internal Control Over Financial Reporting



There have been no changes during the Companys fourth
fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



|ITEM 9B | OTHER INFORMATION
|------- | -----------------



None.



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PART III



ITEM 10    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE



The information set forth under the captions Proposal 1Election of DirectorsNominees for Class I Directors,Class
II Directors, andClass III Directors, Biographical InformationDirectors, Section 16 Beneficial Ownership Compliance, The Board of Directors and its CommitteesAdditional Governance
PoliciesCode of Conduct and Business Practices, the first paragraph under The Board of Directors and its CommitteesAudit Committee, and the second paragraph under The Board of Directors and its
CommitteesAudit CommitteeAudit Committee Membership in NFS 2008 Proxy Statement is incorporated herein by reference.



Executive Officers of the Registrant



|                       |  |     |  |                                                                       
|---------------------- |  | --- |  | ----------------------------------------------------------------------
|Name                   |  | Age |  | Position with NFS (as of February 27, 2008)                           
|W.G. Jurgensen         |  | 56  |  | Chief Executive Officer                                               
|Mark R. Thresher       |  | 51  |  | President and Chief Operating Officer                                 
|Patricia R. Hatler     |  | 53  |  | Executive Vice PresidentChief Legal and Governance Officer           
|Terri L. Hill          |  | 48  |  | Executive Vice PresidentChief Administrative Officer                 
|Lawrence A. Hilsheimer |  | 50  |  | Executive Vice President                                              
|Michael C. Keller      |  | 48  |  | Executive Vice PresidentChief Information Officer                    
|James R. Lyski         |  | 45  |  | Executive Vice PresidentChief Marketing Officer                      
|Stephen S. Rasmussen   |  | 55  |  | Executive Vice President                                              
|Robert A. Rosholt      |  | 57  |  | Executive Vice PresidentFinance, Investments and Strategy            
|Anne L. Arvia          |  | 44  |  | Senior Vice PresidentNationwide Bank                                 
|Carol A. Baldwin Moody |  | 51  |  | Senior Vice PresidentChief Compliance Officer                        
|Thomas E. Barnes       |  | 54  |  | Senior Vice PresidentAssistant to the CEO and Secretary              
|John L. Carter         |  | 45  |  | Senior Vice PresidentNon-Affiliated Sales                            
|Roger A. Craig         |  | 45  |  | Senior Vice PresidentDivision General Counsel and Assistant Secretary
|Timothy G. Frommeyer   |  | 43  |  | Senior Vice PresidentChief Financial Officer                         
|Peter A. Golato        |  | 54  |  | Senior Vice PresidentIndividual Protection Business Head             
|Harry H. Hallowell     |  | 47  |  | Senior Vice President and Treasurer                                   
|Kelly A. Hamilton      |  | 43  |  | Senior Vice PresidentInternal Audits                                 
|Michael A. Hamilton    |  | 41  |  | Senior Vice PresidentNFN Retail Distribution                         
|Eric S. Henderson      |  | 45  |  | Senior Vice PresidentIndividual Investments Business                 
|William S. Jackson     |  | 54  |  | Senior Vice PresidentNationwide Retirement Plans                     
|Gail G. Snyder         |  | 53  |  | Senior Vice PresidentChief Investment Officer                        



Business experience for each of the individuals listed in the above table is set forth below:



W.G. Jurgensen has been Chief Executive Officer of NFS and several subsidiaries of NFS since August 2000 and a director of NFS
since May 2000. He served as Chairman of the Board of NFS from January 2001 to June 2003 and Chief Executive OfficerElect from May to August 2000. Since August 2000, he has been Chief Executive Officer of NMIC, Nationwide Mutual Fire Insurance
Company (Nationwide Mutual Fire), NLIC and NLAIC, and was Chief Executive OfficerElect of those companies from May to August 2000. He also serves as Chief Executive Officer of several other companies within Nationwide, which is comprised of
NFS, NMIC, Nationwide Mutual Fire and all of their respective subsidiaries and affiliates (collectively, Nationwide). Mr. Jurgensen has been a director of NMIC, Nationwide Mutual Fire, NLIC and NLAIC since May 2000 and serves as a director of
several other companies within Nationwide, as well as a trustee of Nationwide Foundation, a not-for-profit corporation that contributes to nonprofit agencies and community projects. Mr. Jurgensen has been a director of ConAgra Foods, Inc., a
producer and marketer of food products, since August 2002. Before joining Nationwide, Mr. Jurgensen was Executive Vice President of Bank One Corporation (now JP Morgan



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Chase & Co.), an investment banking and financial services institution, from 1998 to May 2000. He served as Executive Vice President of First
Chicago NBD Corporation, a financial institution, and Chairman of FCC National Bank, a financial institution, from 1996 to May 1998.



Mark R. Thresher has been President and Chief Operating Officer of NFS, NLIC and NLAIC since May 2004. He was President and Chief
Operating OfficerElect from April 2004 to May 2004; President and Chief Operating OfficerElect and Chief Financial Officer from December 2003 to April 2004; and Senior Vice PresidentChief Financial Officer from November 2002 to
December 2003 of NFS, NLIC and NLAIC. Mr. Thresher also served NFS as its Senior Vice PresidentChief Financial Officer and Treasurer from November 2002 to December 2003; Senior Vice PresidentFinance and Treasurer from May 1999 to
November 2002; and Vice PresidentFinance and Controller from December 1996 to May 1999. He was Senior Vice PresidentFinance of NLIC and NLAIC from May 1999 to November 2002, and Vice PresidentController of those companies from
December 1996 to May 1999. He also served as Vice President and Treasurer of several other companies within Nationwide from June 1996 to August 1996. Prior to joining Nationwide, Mr. Thresher served as a partner with KPMG LLP, a public
accounting firm, from July 1988 to May 1996.



Patricia R. Hatler has been Executive Vice PresidentChief Legal and Governance Officer of NFS since December 2004. Previously, Ms. Hatler served NFS as its Executive Vice President and General Counsel from October 2004 to
December 2004; Executive Vice President, General Counsel and Secretary from March 2003 to October 2004; Senior Vice President, General Counsel and Secretary from May 2000 to March 2003; and Senior Vice President and General Counsel from August 1999
to May 2000. She has been Executive Vice President and Chief Legal and Governance Officer of several other companies within Nationwide since December 2004 and held similar positions with several Nationwide companies, including Executive Vice
President, General Counsel and Secretary, since July 1999. Prior to that time, she was General Counsel and Corporate Secretary of Independence Blue Cross, a health insurance provider, from 1983 to July 1999.



Terri L. Hill has been Executive Vice
PresidentChief Administrative Officer of NFS and several other Nationwide companies since September 2003. She was Senior Vice PresidentHuman Resources/Operations for Scottsdale Insurance Company (Scottsdale), a wholly-owned subsidiary of
NMIC, and its affiliates from December 2000 to September 2003; Vice PresidentHuman Resources/Communications of Scottsdale from May 1997 to December 2000; and Vice PresidentHuman Resources of Scottsdale from October 1996 to May 1997.
Ms. Hill was Vice PresidentHuman Relations from February 1985 to September 1996 at American Express, a diversified worldwide travel, financial and network services company, and Director of Personnel for Bullocks Department Stores, a
department store retailer, from August 1981 to February 1985.



Larry A. Hilsheimer has been Executive Vice President of NFS and several other companies within Nationwide since October 2007. Prior to joining Nationwide, Mr. Hilsheimer served as a partner of Deloitte
and Touche USA LLP, from June 1988 to October 2007, and was a Senior Manager from June 1986 to June 1988.



Michael C. Keller has been Executive Vice PresidentChief Information Officer of NFS since August 2001. Mr. Keller has
been Executive Vice PresidentChief Information Officer of several other companies within Nationwide since June 2001. Prior to that time, Mr. Keller was Senior Vice President of Bank One, a financial institution, from January 1998 to June
2001, and held various management positions with IBM Corporation, an information technology company, from July 1982 to December 1997.



James R. Lyski has been Executive Vice PresidentChief Marketing Officer of NFS since October 2006. Mr. Lyski previously
served as Senior Vice President for Strategy, Product and Marketing at CIGNA HealthCare, Inc., an employee benefits company, from October 2002 to October 2006; as Chief Operating Officer of Atabok, Inc., a Boston-based technology company, from June
2000 to October 2002; and as Vice President for U.S. Marketing at FedEx Corporation, a global shipping company, from August 1989 to May 2000.



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Stephen S. Rasmussen has been Executive Vice President of NFS and President and
Chief Operating Officer of NMIC and Nationwide Mutual Fire since September 2003. Since December 2000, Mr. Rasmussen has served as a Director, President and Chief Operating Officer of ALLIED Group, Inc., a wholly-owned subsidiary of NMIC. He
also serves as Chairman and Director of several Allied subsidiaries and as Director of several other companies within Nationwide.



Robert A. Rosholt has been Executive Vice PresidentFinance, Investments and Strategy of NFS since October 2002. Since January
2006, he has served as Executive Vice PresidentChief Financial Officer of NMIC and several other companies within Nationwide. He served as Executive Vice PresidentChief Finance and Investment Officer of NMIC and several other companies
within Nationwide from October 2002 to December 2005. He also serves as a Director of several Nationwide companies. Prior to joining Nationwide, Mr. Rosholt was Executive Vice President and Chief Operating Officer of the U.S. brokerage business
of Aon Corporation, a provider of risk management, retail, reinsurance, and wholesale brokerage, claims management, and human capital consulting services, from September 2000 to October 2002, and held various management positions, including Chief
Financial Officer, with Bank One from June 1974 to May 2000.



Anne L. Arvia has been Senior Vice PresidentNationwide Bank since September 2006. Prior to joining Nationwide Bank, Ms. Arvia served as the Chief Executive Officer of ShoreBank, a community and
environmental bank, from May 2002 to August 2006; as the President of ShoreBank from May 2001 to August 2006; and held various other positions with ShoreBank from May 1991 to April 2002.



Carol A. Baldwin Moody has been Senior Vice President, Chief Compliance Officer of NFS and several
other companies within Nationwide since October 2005. Previously, she was Chief Compliance Officer for TIAA-CREF from 2004 to 2005. Prior to that time, she served as Managing Director and General Counsel of TCW/Latin America Partners LLC from 2000
to 2004 and held various senior-level positions with Citibank from 1988 to 2000.



Thomas E. Barneshas been Senior Vice PresidentAssistant to the CEO and Secretary of NFS and several other companies within Nationwide since July 2007. Previously, Mr. Barnes
served several Nationwide companies as Vice PresidentAssistant to the CEO and Secretary from March 2005 to July 2007; Vice PresidentCorporate Governance and Secretary from October 2004 to March 2005; Vice President and Assistant
Secretary May 2003 to October 2004; as Associate Vice President and Assistant Secretary from May 2002 to May 2003; and in various other positions within Nationwide since 1984.



John L. Carter has been Senior Vice PresidentNon-Affiliated Sales of NFS, NLIC and NLAIC and
President of Nationwide Financial Distributors, Inc., as well as Senior Vice President of several other Nationwide companies, since November 2005. Previously, he served as Corporate Vice President of Platform Distribution at Prudential Financial, a
financial services company, from August 1999 to November 2005. Prior to that time, Mr. Carter held positions with other financial services firms, including Kidder Peabody, where he served in executive sales positions, and UBS.



Roger A. Craighas been Senior Vice
PresidentDivision General Counsel and Assistant Secretary of NFS since August 2007, and Senior Vice PresidentDivision General Counsel of several other companies within Nationwide since July 2007. Previously, Mr. Craig served several
Nationwide companies as Vice PresidentDivision General Counsel from October 2004 to August 2007; Vice PresidentAssociate General Counsel from March 2003 to October 2004; Associate Vice PresidentAssociate General Counsel from
February 2001 to March 2003; and in various other positions within Nationwide since 1991. Prior to that time, he was counsel to Huffy Corporation and an attorney at Crabbe, Brown, Jones, Potts & Schmidt.



Timothy G. Frommeyer has been Senior Vice
PresidentChief Financial Officer of NFS and several other Nationwide companies since November 2005. He served as Vice President and Chief Actuary of NLIC and NLAIC from May 2004 to November 2005. He also served as Senior Vice
PresidentFinance and Actuarial of NRS from November 2001 to May 2004 and Vice PresidentPublic Sector Finance and Actuarial of NLIC and



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NLAIC from November 2001 to May 2004. From April 2000 to May 2001, Mr. Frommeyer served as Associate Vice PresidentPublic Sector and Retail
Actuarial of NLIC and NLAIC. Prior to that time, he held various other positions within Nationwide.



Peter A. Golato has been Senior Vice PresidentIndividual Protection Business Head of NFS and several other companies within Nationwide since May 2004. Mr. Golato also serves as
a Director (since May 2004) and President (since August 2004) of NLICA, NLACA and Nationwide Life Insurance Company of Delaware (NLIC of Delaware). Previously, he was Vice PresidentBrokerage Life Sales of NLIC and NLAIC from May 2000 to May
2004, and NMIC and Nationwide Mutual Fire from May 2000 to October 2004. Mr. Golato held various positions within Nationwide from March 1993 to May 2000. Prior to that time, he was Marketing Manager for Aetna Life and Casualty Company, a
provider of managed care benefits and dental, pharmacy, vision, and group insurance coverage, from September 1976 to March 1993.



Harry H. Hallowell has been Senior Vice President and Treasurer of NFS and several other companies within Nationwide since January
2006. Previously, Mr. Hallowell served as Vice President and Head Portfolio Risk Manager for Nationwides Office of Investments from May 2003 to December 2005. From 1984 to 2003, he served as a Senior Vice President and Head of Corporate
Funding for Bank One Corporation.



Kelly A.
Hamilton has been Senior Vice PresidentInternal Audits of NFS and several other companies within Nationwide since September 2005. She served several Nationwide companies as Senior Vice PresidentPC Finance, from September 2003 to
August 2005; Vice PresidentCorporate Controller, from August 2001 to September 2003, and Associate Vice PresidentCorporate Accounting Services, from April 2000 to August 2001. Additionally, Ms. Hamilton held other positions within
Nationwide starting in July 1995. Ms. Hamilton also serves as a Director of several Nationwide companies. Previously, she held a variety of management and accounting positions at KPMG LLP from January 1986 to July 1995.



Michael A. Hamilton has been Senior Vice
PresidentNFN Retail Distribution of NFS and several other companies within Nationwide since October 2007. Mr. Hamilton has also served as a Director of NLICA, NLACA and Nationwide Life Insurance Company of Delaware since May 2007.
Previously, he served as Vice PresidentNFN Retail Distribution of NLIC and NLAIC from April 2007 to October 2007. Prior to joining Nationwide, Mr. Hamilton served as the President of Pennsylvania Life Insurance Company from April 2004 to
January 2007; the Regional Director of National Planning Corporation from April 2000 to July 2003; and the Regional Director of Jackson National Life Distributors, Inc. from April 1998 to April 2004.



Eric S. Hendersonhas been Senior Vice
PresidentIndividual Investments Business Head of NFS and several other companies within Nationwide since August 2007. Previously, Mr. Henderson served as Vice PresidentCFOIndividual Investments from August 2004 to August 2007;
as Vice PresidentProduct Management from February 2004 to August 2004; as Associate Vice PresidentProduct Manager-Variable Annuities from April 2002 to February 2004; and in various other positions within Nationwide since 1985.



William S. Jackson has been Senior Vice
President, Nationwide Retirement Plans, of NFS since October 2006. Previously, Mr. Jackson served as Sales Center Vice President from August 2001 to September 2006; as Sales Financial Services Sales Officer from February 1999 to August 2001;
and in various other positions within Nationwide since 1984.



Gail G. Snyder has been Senior Vice PresidentChief Investment Officer of NFS and several other Nationwide companies since January 2006. She was previously Senior Vice PresidentEnterprise Portfolio
and Strategy Management of NMIC and several other Nationwide companies from January 2005 to January 2006. Previously, she served as Senior Vice PresidentPortfolio Management of Genworth Financial, Inc., an insurance and financial services
company, from May 2004 to December 2004. From March 1995 to May 2005, she served in various capacities at divisions of General Electric, including Senior Vice PresidentInsurance-Strategic Client Solutions of GE Asset Management, a financial
services firm; Chief Investment Officer of GE



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Mortgage Insurance, a mortgage services firm; and Vice President of First Colony Life Insurance Company, an insurance services company acquired by General
Electric. She also held various investment positions at Provident Life and Accident Insurance Company, an insurance services company, from December 1986 to March 1995.



The Board of Directors adopted the Nationwide Code of Conduct and Business Practices (Code), which is posted on the
Companys web site (http://www.nationwidefinancial.com) under the Corporate Governance subsection of the Investor Relations area of the web site. The Code is available in print, free of charge, to any shareholder who requests it. Requests for
copies should be made to Mark Barnett, Vice PresidentInvestor Relations, One Nationwide Plaza, Columbus, Ohio, 43215, or via telephone at 614-249-8437. All directors, officers and employees of the Nationwide group of companies are required to
adhere to the Code. As required by SEC regulations and the listing standards of the New York Stock Exchange, the Code contains written standards designed to deter wrongdoing and to promote honest, ethical conduct including ethical handling of
conflicts; full, fair, accurate, timely and understandable disclosure in regulatory reports and public communications; compliance with laws, rules and regulations; prompt internal reporting of violations of the Code; and accountability for adherence
to the Code. It also contains compliance standards and procedures that facilitate the effective operation of the Code. Any waivers from, or amendments to, the Code for directors and executive officers must be approved by the Board of Directors or a
designated board committee and will be promptly disclosed to the shareholders by posting any waiver on the NFS web site listed above.



ITEM 11    EXECUTIVE COMPENSATION



Information required by this item is set forth under the captions Director Compensation and Executive Compensation in the NFS 2008 Proxy Statement and is incorporated
herein by reference.



|ITEM 12 | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|------- | ----------------------------------------------------------------------------------------------



Information required by this item is set forth under the
caption Beneficial Ownership of Common Stock in the NFS 2008 Proxy Statement and is incorporated herein by reference.



|ITEM 13 | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|------- | -------------------------------------------------------------------------



Information required by this item is set forth under the captions Certain Relationships and Related
Transactions and The Board of Directors and its CommitteesAdditional Governance PoliciesIndependence Standards for Directors in the NFS 2008 Proxy Statement and is incorporated herein by reference.



ITEM 14    PRINCIPAL ACCOUNTING FEES AND SERVICES



Information required by this item is set forth under the caption Proposal 2Ratification of the Appointment of Independent
Registered Public Accounting FirmPrincipal Accounting Fees and Services in the NFS 2008 Proxy Statement and is incorporated herein by reference.



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PART IV



ITEM 15    EXHIBITS, FINANCIAL STATEMENT SCHEDULES



|                                                                                                                     |  |     
|-------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                     |  | Page
|Consolidated Financial Statements                                                                                    |  |     
|Management Report on Internal Control Over Financial Reporting                                                       |  | F-1 
|Report of Independent Registered Public Accounting Firm                                                              |  | F-2 
|Report of Independent Registered Public Accounting Firm                                                              |  | F-3 
|Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005                               |  | F-4 
|Consolidated Balance Sheets as of December 31, 2007 and 2006                                                         |  | F-5 
|Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 2007, 2006 and 2005      |  | F-6 
|Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005                           |  | F-7 
|Notes to Consolidated Financial Statements                                                                           |  | F-8 
|                                                                                                                     | 
|Financial Statement Schedules                                                                                        |  |     
|                                                                                                                     | 
|Schedule IConsolidated Summaryof InvestmentsOther Than Investments in Related Parties as of December 31, 2007      |  | F-75
|                                                                                                                     | 
|Schedule IICondensed Financial Information of Registrant                                                            |  | F-76
|                                                                                                                     | 
|Schedule IIISupplementary Insurance Information as of December 31, 2007, 2006 and 2005 and for the years then ended |  | F-79
|                                                                                                                     | 
|Schedule IVReinsurance as of December 31, 2007, 2006 and 2005 and for the years then ended                          |  | F-80
|                                                                                                                     | 
|Schedule VValuation and Qualifying Accounts for the years ended December 31, 2007, 2006 and 2005                    |  | F-81
|Exhibits                                                                                                             |  | F-83



All
other schedules are omitted because they are not applicable or not required, or because the required information has been included in the audited consolidated financial statements or notes thereto.



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Management Report on Internal Control Over Financial Reporting



The management of Nationwide Financial Services, Inc. and its subsidiaries (the Company) is responsible for the preparation and integrity of the consolidated financial statements and other
financial information contained in this Annual Report on Form 10-K. The consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles, and where necessary, include amounts that are based on the best
estimates and judgment of management. Management believes the consolidated financial statements present fairly the Companys financial position and results of operations and that other financial data contained in the Annual Report on Form 10-K
has been compiled in a manner consistent with the consolidated financial statements.



Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of
1934. Our internal control system was designed to provide reasonable assurance to management and our Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how
well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the preparation and presentation of financial statements.



Our management assessed the effectiveness of the
Companys internal control over financial reporting as of December 31, 2007. In making this assessment, our management used the criteria set forth in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on those criteria, our management concluded that the Companys internal control over financial reporting was effective as of December 31, 2007.



Our independent registered public accounting firm, KPMG LLP,
performed audits of the Companys consolidated financial statements and internal control over financial reporting. Management has made available to KPMG LLP all of the Companys financial records and related data.



Management also recognizes its responsibility for fostering a
strong ethical business environment that ensures the Companys affairs are conducted according to the highest standards of professional conduct, honesty and integrity. The Companys Code of Conduct and Business Practices (Code), which is
posted on the Companys web site, reflects this responsibility. The Code addresses the necessity of ensuring open communication within the Company; potential conflicts of interest; marketing practices; compliance with all laws, including those
relating to financial disclosure; and the confidentiality of proprietary information. The Companys Office of Ethics and Business Practices is responsible for raising employee awareness of the Companys Code and serves as a confidential
resource for inquiries and reporting.



The
Audit Committee of the Board of Directors of the Company, composed of independent directors pursuant to the New York Stock Exchange listing standards and rules of the Securities and Exchange Commission, meets periodically with the external and
internal auditors, jointly and separately, to evaluate the effectiveness of work performed by them in discharging their respective responsibilities and to assure their independence and free access to the Audit Committee.



|                     |  |                                      
|-------------------- |  | -------------------------------------
|/s/ Mark R. Thresher
|Name:                |  | Mark R. Thresher                     
|Title:               |  | President and Chief Operating Officer



February 29, 2008



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##### Table of Contents

Report of Independent Registered Public Accounting Firm



The Board of Directors and Shareholders

Nationwide Financial Services, Inc.:



We have audited Nationwide Financial Services, Inc. and subsidiaries (the Companys) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).The Companys management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control Over Financial Reporting contained in Item 9A, Controls and Procedures, of the
Companys 2007 Annual Report on Form 10-K. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.



In our opinion, Nationwide Financial Services, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of Nationwide Financial Services, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders equity and cash flows for each of the years in the three-year period
ended December 31, 2007, and our report dated February 29, 2008 expressed an unqualified opinion on those consolidated financial statements.



|                 
|-----------------
|/s/ KPMG LLP     
|Columbus, Ohio   
|February 29, 2008



F-2



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##### Table of Contents

Report of Independent Registered Public Accounting Firm



The Board of Directors and Shareholders

Nationwide Financial Services, Inc.:



We have audited the accompanying consolidated balance sheets of Nationwide Financial Services, Inc. and subsidiaries (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of
income, shareholders equity and cash flows for each of the years in the three-year period ended December 31, 2007. In connection with our audits of the consolidated financial statements, we also have audited the financial statement
schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial position of Nationwide Financial Services, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Nationwide
Financial Services, Inc. and subsidiaries internal control over financial reporting as of December 31, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated February 29, 2008 expressed an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.



As discussed in Note 3 to the consolidated financial
statements, the Company adopted the American Institute of Certified Public Accountants Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance
Contracts,in 2007.



|                 
|-----------------
|/s/ KPMG LLP     
|Columbus, Ohio   
|February 29, 2008



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Consolidated Statements of Income

(in millions, except per share amounts)



|                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                    |  | Years ended December 31, |        
|                                                                    |  | 2007                     |         |   | 2006 |   |         | 2005 | 
|Revenues:                                                           |  |                          |         |   |      |   |         |      |  |   |         |  
|Policy charges                                                      |  | $                        | 1,383.9 |   |      | $ | 1,316.0 |      |  | $ | 1,241.5 |  
|Premiums                                                            |  |                          | 432.7   |   |      |   | 441.5   |      |  |   | 399.9   |  
|Net investment income                                               |  |                          | 2,276.7 |   |      |   | 2,300.2 |      |  |   | 2,344.1 |  
|Net realized investment (losses) gains                              |  |                          | (165.2  | ) |      |   | 9.1     |      |  |   | 20.8    |  
|Other income                                                        |  |                          | 600.8   |   |      |   | 495.7   |      |  |   | 409.9   |  
|                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Total revenues                                                      |  |                          | 4,528.9 |   |      |   | 4,562.5 |      |  |   | 4,416.2 |  
|                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Benefits and expenses:                                              |  |                          |         |   |      |   |         |      |  |   |         |  
|Interest credited to policyholder accounts                          |  |                          | 1,342.0 |   |      |   | 1,381.5 |      |  |   | 1,380.9 |  
|Benefits and claims                                                 |  |                          | 682.9   |   |      |   | 646.8   |      |  |   | 574.9   |  
|Policyholder dividends                                              |  |                          | 83.1    |   |      |   | 90.7    |      |  |   | 107.3   |  
|Amortization of deferred policy acquisition costs                   |  |                          | 382.1   |   |      |   | 462.9   |      |  |   | 480.2   |  
|Amortization of value of business acquired                          |  |                          | 47.0    |   |      |   | 46.0    |      |  |   | 45.0    |  
|Interest expense                                                    |  |                          | 110.6   |   |      |   | 103.1   |      |  |   | 107.6   |  
|Debt extinguishment costs                                           |  |                          | 10.2    |   |      |   |        |      |  |   | 21.7    |  
|Other operating expenses                                            |  |                          | 1,070.6 |   |      |   | 1,032.2 |      |  |   | 918.2   |  
|                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Total benefits and expenses                                         |  |                          | 3,728.5 |   |      |   | 3,763.2 |      |  |   | 3,635.8 |  
|                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Income from continuing operations before federal income tax expense |  |                          | 800.4   |   |      |   | 799.3   |      |  |   | 780.4   |  
|Federal income tax expense                                          |  |                          | 190.7   |   |      |   | 72.2    |      |  |   | 141.4   |  
|                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Income from continuing operations                                   |  |                          | 609.7   |   |      |   | 727.1   |      |  |   | 639.0   |  
|Discontinued operations, net of taxes                               |  |                          | 23.1    |   |      |   | (3.1    | )    |  |   | (28.6   | )
|Cumulative effect of adoption of accounting principle, net of taxes |  |                          | (6.0    | ) |      |   |        |      |  |   |        |  
|                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Net income                                                          |  | $                        | 626.8   |   |      | $ | 724.0   |      |  | $ | 610.4   |  
|                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Earnings from continuing operations per common share:               |  |                          |         |   |      |   |         |      |  |   |         |  
|Basic                                                               |  | $                        | 4.28    |   |      | $ | 4.85    |      |  | $ | 4.18    |  
|Diluted                                                             |  | $                        | 4.25    |   |      | $ | 4.82    |      |  | $ | 4.16    |  
|Earnings per common share:                                          |  |                          |         |   |      |   |         |      |  |   |         |  
|Basic                                                               |  | $                        | 4.40    |   |      | $ | 4.83    |      |  | $ | 3.99    |  
|Diluted                                                             |  | $                        | 4.37    |   |      | $ | 4.80    |      |  | $ | 3.97    |  
|Weighted average common shares outstanding:                         |  |                          |         |   |      |   |         |      |  |   |         |  
|Basic                                                               |  |                          | 142.5   |   |      |   | 149.9   |      |  |   | 152.9   |  
|Diluted                                                             |  |                          | 143.5   |   |      |   | 150.7   |      |  |   | 153.6   |  
|                                                                    |  |                          |        
|Cash dividends declared per common share                            |  | $                        | 1.04    |   |      | $ | 0.92    |      |  | $ | 0.76    |  



See accompanying notes
to consolidated financial statements.



F-4



---

##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Consolidated Balance Sheets

(in millions, except per share amounts)



|                                                                                                                               |  |              |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | --------- | - | ---- | - | --------- | -
|                                                                                                                               |  | December 31, |          
|                                                                                                                               |  | 2007         |           |   | 2006 |  
|Assets                                                                                                                         |  |              |           |   |      |   |           |  
|Investments:                                                                                                                   |  |              |           |   |      |   |           |  
|Securities available-for-sale, at fair value:                                                                                  |  |              |           |   |      |   |           |  
|Fixed maturity securities (cost $27,263.9 and $28,067.2)                                                                       |  | $            | 27,189.2  |   |      | $ | 28,160.0  |  
|Equity securities (cost $117.5 and $57.2)                                                                                      |  |              | 124.2     |   |      |   | 67.6      |  
|Mortgage loans on real estate, net                                                                                             |  |              | 8,316.1   |   |      |   | 8,909.8   |  
|Short-term investments, including amounts managed by a related party                                                           |  |              | 1,173.6   |   |      |   | 2,215.6   |  
|Other investments                                                                                                              |  |              | 2,265.0   |   |      |   | 1,906.3   |  
|                                                                                                                               |  |              |           |   |      |   |           |  
|Total investments                                                                                                              |  |              | 39,068.1  |   |      |   | 41,259.3  |  
|Cash                                                                                                                           |  |              | 73.6      |   |      |   | 84.1      |  
|Accrued investment income                                                                                                      |  |              | 368.4     |   |      |   | 373.8     |  
|Deferred policy acquisition costs                                                                                              |  |              | 4,095.6   |   |      |   | 3,851.0   |  
|Value of business acquired                                                                                                     |  |              | 354.8     |   |      |   | 392.7     |  
|Goodwill                                                                                                                       |  |              | 301.2     |   |      |   | 359.0     |  
|Other assets                                                                                                                   |  |              | 2,090.4   |   |      |   | 2,516.5   |  
|Separate account assets                                                                                                        |  |              | 72,855.0  |   |      |   | 70,694.7  |  
|                                                                                                                               |  |              |           |   |      |   |           |  
|Total assets                                                                                                                   |  | $            | 119,207.1 |   |      | $ | 119,531.1 |  
|                                                                                                                               |  |              |           |   |      |   |           |  
|Liabilities and Shareholders Equity                                                                                           |  |              |           |   |      |   |           |  
|Liabilities:                                                                                                                   |  |              |           |   |      |   |           |  
|Future policy benefits and claims                                                                                              |  | $            | 35,441.5  |   |      | $ | 38,097.8  |  
|Short-term debt                                                                                                                |  |              | 309.3     |   |      |   | 85.2      |  
|Long-term debt                                                                                                                 |  |              | 1,565.1   |   |      |   | 1,398.5   |  
|Other liabilities                                                                                                              |  |              | 3,711.6   |   |      |   | 3,632.2   |  
|Separate account liabilities                                                                                                   |  |              | 72,855.0  |   |      |   | 70,694.7  |  
|                                                                                                                               |  |              |           |   |      |   |           |  
|Total liabilities                                                                                                              |  |              | 113,882.5 |   |      |   | 113,908.4 |  
|                                                                                                                               |  |              |           |   |      |   |           |  
|Shareholders equity:                                                                                                          |  |              |           |   |      |   |           |  
|Preferred stock ($0.01 par value; authorized50.0 shares; issued and outstandingnone)                                         |  |              |          |   |      |   |          |  
|Class A common stock ($0.01 par value; authorized750.0 shares; issued71.7 and 69.7 shares; outstanding46.7 and 54.2
shares) |  |              | 0.7       |   |      |   | 0.7       |  
|Class B common stock ($0.01 par value; authorized750.0 shares; issued and outstanding91.8 shares)                            |  |              | 1.0       |   |      |   | 1.0       |  
|Additional paid-in capital                                                                                                     |  |              | 1,782.4   |   |      |   | 1,688.5   |  
|Retained earnings                                                                                                              |  |              | 4,853.0   |   |      |   | 4,618.5   |  
|Accumulated other comprehensive (loss) income                                                                                  |  |              | (81.5     | ) |      |   | 31.9      |  
|Treasury stock, at cost (25.0 and 15.5 shares)                                                                                 |  |              | (1,229.6  | ) |      |   | (716.3    | )
|Other, net                                                                                                                     |  |              | (1.4      | ) |      |   | (1.6      | )
|                                                                                                                               |  |              |           |   |      |   |           |  
|Total shareholders equity                                                                                                     |  |              | 5,324.6   |   |      |   | 5,622.7   |  
|                                                                                                                               |  |              |           |   |      |   |           |  
|Total liabilities and shareholders equity                                                                                     |  | $            | 119,207.1 |   |      | $ | 119,531.1 |  
|                                                                                                                               |  |              |           |   |      |   |           |  



F-5



---

##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Consolidated Statements of Changes in Shareholders Equity

(in millions)



|                                                     |  |                    |     |                    |   |                          |  |   |                  |   |  |                                            |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|---------------------------------------------------- |  | ------------------ | --- | ------------------ | - | ------------------------ |  | - | ---------------- | - |  | ------------------------------------------ | ------- | - | ------------- | - | ------ | --------- |  | - | ------------------------ | - |  | - | ---- | - |  | - | ------- | -
|                                                     |  | Class Acommonstock |     | Class Bcommonstock |   | Additionalpaid-incapital |  |   | Retainedearnings |   |  | Accumulatedothercomprehensive(loss) income |         |   | Treasurystock |   |        | Other,net |  |   | Totalshareholdersequity |  
|Balance as of December 31, 2004                      |  | $                  | 0.7 |                    | $ | 1.0                      |  | $ | 1,517.2          |   |  | $                                          | 3,536.3 |   |               | $ | 432.2  |           |  | $ | (251.4                   | ) |  | $ | (2.0 | ) |  | $ | 5,234.0 |  
|Cash dividends declared                              |  |                    |    |                    |   |                         |  |   |                 |   |  |                                            | (116.2  | ) |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | (116.2  | )
|Common shares repurchased under announced program    |  |                    |    |                    |   |                         |  |   |                 |   |  |                                            |        |   |               |   |       |           |  |   | (51.4                    | ) |  |   |     |   |  |   | (51.4   | )
|Stock options exercised                              |  |                    |    |                    |   |                         |  |   | 39.4             |   |  |                                            |        |   |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | 39.4    |  
|Other, net                                           |  |                    |    |                    |   |                         |  |   | 3.4              |   |  |                                            | 0.6     |   |               |   |       |           |  |   | (1.4                     | ) |  |   | 0.3  |   |  |   | 2.9     |  
|Comprehensive income:                                |  |                    |     |                    |   |                          |  |   |                  |   |  |                                            |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Net income                                           |  |                    |    |                    |   |                         |  |   |                 |   |  |                                            | 610.4   |   |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | 610.4   |  
|Other comprehensive loss, net of taxes               |  |                    |    |                    |   |                         |  |   |                 |   |  |                                            |        |   |               |   | (331.5 | )         |  |   |                         |   |  |   |     |   |  |   | (331.5  | )
|                                                     |  |                    |     |                    |   |                          |  |   |                  |   |  |                                            |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Total comprehensive income                           |  |                    |     |                    |   |                          |  |   |                  |   |  |                                            |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   | 278.9   |  
|                                                     |  |                    |     |                    |   |                          |  |   |                  |   |  |                                            |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Balance as of December 31, 2005                      |  |                    | 0.7 |                    |   | 1.0                      |  |   | 1,560.0          |   |  |                                            | 4,031.1 |   |               |   | 100.7  |           |  |   | (304.2                   | ) |  |   | (1.7 | ) |  |   | 5,387.6 |  
|                                                     |  |                    |     |                    |   |                          |  |   |                  |   |  |                                            |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|                                                     |  |                    |     |                    |   |                          |  |  
|Cash dividends declared                              |  |                    |    |                    |   |                         |  |   |                 |   |  |                                            | (136.6  | ) |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | (136.6  | )
|Common shares repurchased under announced program    |  |                    |    |                    |   |                         |  |   | (4.8             | ) |  |                                            |        |   |               |   |       |           |  |   | (412.0                   | ) |  |   |     |   |  |   | (416.8  | )
|Stock options exercised                              |  |                    |    |                    |   |                         |  |   | 87.6             |   |  |                                            |        |   |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | 87.6    |  
|Other, net                                           |  |                    |    |                    |   |                         |  |   | 45.7             |   |  |                                            |        |   |               |   |       |           |  |   | (0.1                     | ) |  |   | 0.1  |   |  |   | 45.7    |  
|Comprehensive income:                                |  |                    |     |                    |   |                          |  |   |                  |   |  |                                            |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Net income                                           |  |                    |    |                    |   |                         |  |   |                 |   |  |                                            | 724.0   |   |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | 724.0   |  
|Other comprehensive loss,                            |  |                    |    |                    |   |                         |  |   |                 |   |  |                                            |        |   |               |   | (68.8  | )         |  |   |                         |   |  |   |     |   |  |   | (68.8   | )
|                                                     |  |                    |     |                    |   |                          |  |   |                  |   |  |                                            |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Total comprehensive income                           |  |                    |     |                    |   |                          |  |   |                  |   |  |                                            |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   | 655.2   |  
|                                                     |  |                    |     |                    |   |                          |  |   |                  |   |  |                                            |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Balance as of December 31, 2006                      |  |                    | 0.7 |                    |   | 1.0                      |  |   | 1,688.5          |   |  |                                            | 4,618.5 |   |               |   | 31.9   |           |  |   | (716.3                   | ) |  |   | (1.6 | ) |  |   | 5,622.7 |  
|                                                     |  |                    |     |                    |   |                          |  |   |                  |   |  |                                            |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|                                                     |  |                    |     |                    |   |                          |  |  
|Cash dividends declared                              |  |                    |    |                    |   |                         |  |   |                 |   |  |                                            | (190.5  | ) |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | (190.5  | )
|Common shares repurchased under announced program    |  |                    |    |                    |   |                         |  |   | (1.6             | ) |  |                                            |        |   |               |   |       |           |  |   | (511.4                   | ) |  |   |     |   |  |   | (513.0  | )
|Stock options exercised                              |  |                    |    |                    |   |                         |  |   | 75.0             |   |  |                                            |        |   |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | 75.0    |  
|Nationwide Funds Group acquisition, net (see Note 2) |  |                    |    |                    |   |                         |  |   | 12.1             |   |  |                                            | (202.5  | ) |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | (190.4  | )
|Other, net                                           |  |                    |    |                    |   |                         |  |   | 8.4              |   |  |                                            | 0.7     |   |               |   |       |           |  |   | (1.9                     | ) |  |   | 0.2  |   |  |   | 7.4     |  
|Comprehensive income:                                |  |                    |     |                    |   |                          |  |   |                  |   |  |                                            |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Net income                                           |  |                    |    |                    |   |                         |  |   |                 |   |  |                                            | 626.8   |   |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | 626.8   |  
|Other comprehensive loss, net of taxes               |  |                    |    |                    |   |                         |  |   |                 |   |  |                                            |        |   |               |   | (113.4 | )         |  |   |                         |   |  |   |     |   |  |   | (113.4  | )
|                                                     |  |                    |     |                    |   |                          |  |   |                  |   |  |                                            |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Total comprehensive income                           |  |                    |     |                    |   |                          |  |   |                  |   |  |                                            |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   | 513.4   |  
|                                                     |  |                    |     |                    |   |                          |  |   |                  |   |  |                                            |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Balance as of December 31, 2007                      |  | $                  | 0.7 |                    | $ | 1.0                      |  | $ | 1,782.4          |   |  | $                                          | 4,853.0 |   |               | $ | (81.5  | )         |  | $ | (1,229.6                 | ) |  | $ | (1.4 | ) |  | $ | 5,324.6 |  
|                                                     |  |                    |     |                    |   |                          |  |   |                  |   |  |                                            |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  



See accompanying notes
to consolidated financial statements.



F-6



---

##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Consolidated Statements of Cash Flows

(in millions)



|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                  |  | Years ended December 31, |         
|                                                                                  |  | 2007                     |          |   | 2006 |   |          | 2005 | 
|Cash flows from operating activities:                                             |  |                          |          |   |      |   |          |      |  |   |          |  
|Net income                                                                        |  | $                        | 626.8    |   |      | $ | 724.0    |      |  | $ | 610.4    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |          |   |      |   |          |      |  |   |          |  
|Gain on sale of subsidiary                                                        |  |                          | (45.5    | ) |      |   |         |      |  |   |         |  
|Net realized investment losses (gains)                                            |  |                          | 165.2    |   |      |   | (9.1     | )    |  |   | (20.8    | )
|Interest credited to policyholder accounts                                        |  |                          | 1,342.0  |   |      |   | 1,381.5  |      |  |   | 1,380.9  |  
|Capitalization of deferred policy acquisition costs                               |  |                          | (631.3   | ) |      |   | (588.4   | )    |  |   | (489.0   | )
|Amortization of deferred policy acquisition costs                                 |  |                          | 382.1    |   |      |   | 462.9    |      |  |   | 480.2    |  
|Amortization and depreciation, excluding debt extinguishment costs                |  |                          | 84.2     |   |      |   | 113.7    |      |  |   | 143.0    |  
|Debt extinguishment costs (non-cash)                                              |  |                          | 10.2     |   |      |   |         |      |  |   | 21.7     |  
|Decrease (increase) in other assets                                               |  |                          | 431.8    |   |      |   | (288.4   | )    |  |   | 615.9    |  
|(Decrease) increase in policy and other liabilities                               |  |                          | (136.6   | ) |      |   | 632.5    |      |  |   | (765.1   | )
|Other, net                                                                        |  |                          | (2.7     | ) |      |   | 4.8      |      |  |   | (4.4     | )
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                         |  |                          | 2,226.2  |   |      |   | 2,433.5  |      |  |   | 1,972.8  |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows from investing activities:                                             |  |                          |          |   |      |   |          |      |  |   |          |  
|Proceeds from maturity of securities available-for-sale                           |  |                          | 4,698.8  |   |      |   | 5,579.4  |      |  |   | 5,555.0  |  
|Proceeds from sale of securities available-for-sale                               |  |                          | 5,026.9  |   |      |   | 2,645.0  |      |  |   | 3,480.5  |  
|Proceeds from repayments or sales of mortgage loans on real estate                |  |                          | 2,570.1  |   |      |   | 2,549.4  |      |  |   | 2,962.9  |  
|Cost of securities available-for-sale acquired                                    |  |                          | (8,946.4 | ) |      |   | (6,489.3 | )    |  |   | (8,295.6 | )
|Cost of mortgage loans on real estate originated or acquired                      |  |                          | (1,951.1 | ) |      |   | (2,319.2 | )    |  |   | (2,716.0 | )
|Net decrease (increase) in short-term investments                                 |  |                          | 1,042.0  |   |      |   | (142.4   | )    |  |   | (55.6    | )
|Collateral (paid) receivedsecurities lending, net                                |  |                          | (207.3   | ) |      |   | (314.6   | )    |  |   | 36.6     |  
|Subsidiary sale                                                                   |  |                          | 115.4    |   |      |   |         |      |  |   |         |  
|Subsidiary mergers and acquisitions                                               |  |                          | (319.2   | ) |      |   |         |      |  |   | (18.0    | )
|Other, net                                                                        |  |                          | 24.9     |   |      |   | (81.0    | )    |  |   | 135.4    |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by investing activities                                         |  |                          | 2,054.1  |   |      |   | 1,427.3  |      |  |   | 1,085.2  |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows from financing activities:                                             |  |                          |          |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in short-term debt                                        |  |                          | 224.1    |   |      |   | (167.1   | )    |  |   | 21.5     |  
|Net proceeds from issuance of long-term debt                                      |  |                          | 460.4    |   |      |   |         |      |  |   | 199.4    |  
|Principal payments on long-term debt                                              |  |                          | (300.0   | ) |      |   |         |      |  |   | (206.2   | )
|Cash dividends paid                                                               |  |                          | (186.9   | ) |      |   | (132.7   | )    |  |   | (114.8   | )
|Investment and universal life insurance product deposits                          |  |                          | 3,913.8  |   |      |   | 3,781.7  |      |  |   | 3,956.1  |  
|Investment and universal life insurance product withdrawals                       |  |                          | (8,101.8 | ) |      |   | (7,024.6 | )    |  |   | (6,914.0 | )
|Common shares repurchased under announced program                                 |  |                          | (502.4   | ) |      |   | (416.8   | )    |  |   | (49.0    | )
|Other, net                                                                        |  |                          | 202.0    |   |      |   | 133.3    |      |  |   | 38.2     |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash used in financing activities                                             |  |                          | (4,290.8 | ) |      |   | (3,826.2 | )    |  |   | (3,068.8 | )
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net (decrease) increase in cash                                                   |  |                          | (10.5    | ) |      |   | 34.6     |      |  |   | (10.8    | )
|Cash, beginning of period                                                         |  |                          | 84.1     |   |      |   | 49.5     |      |  |   | 60.3     |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash, end of period                                                               |  | $                        | 73.6     |   |      | $ | 84.1     |      |  | $ | 49.5     |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  



See accompanying notes
to consolidated financial statements.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2007, 2006 and 2005



(1) Nature of Operations



Nationwide Financial Services, Inc. (NFS, or collectively with its subsidiaries, the Company) was formed in November 1996. NFS is the holding company for Nationwide Life Insurance Company (NLIC) and other companies that comprise the
domestic life insurance and retirement savings operations of the Nationwide group of companies (Nationwide). This group includes Nationwide Financial Network (NFN), which refers to Nationwide Life Insurance Company of America (NLICA) and
subsidiaries, including the affiliated distribution network. NFS is incorporated in Delaware and maintains its principal executive offices in Columbus, Ohio.



The Company is a leading provider of long-term savings and retirement products in the United States of America (U.S.). The Company
develops and sells a diverse range of products including individual annuities, private and public sector group retirement plans, other investment products sold to institutions, life insurance and investment advisory services. The Company also
provides a wide range of banking products and services through Nationwide Bank and mutual funds through Nationwide Funds Group (NFG) (see Note 2(o) for more information).



The Company sells its products through a diverse distribution network. Unaffiliated entities that sell the Companys
products to their own customer bases include independent broker/dealers, financial institutions, wirehouse and regional firms, pension plan administrators, and life insurance specialists. Representatives of the Company that market products directly
to a customer base include Nationwide Retirement Solutions, Inc. (NRS), an indirect wholly-owned subsidiary; NFN producers; Mullin TBG Insurance Agency Services, LLC, a joint venture between the Companys majority-owned subsidiary, TBG
Insurance Services Corporation d/b/a TBG Financial (TBG Financial), and MC Insurance Agency Services, LLC d/b/a Mullin Consulting (Mullin Consulting) (see Note 2(n) for information related to the Companys intention to sell its interest in this
business); and NFG. The Company also distributes retirement savings products through the agency distribution force of its ultimate majority parent company, Nationwide Mutual Insurance Company (NMIC). The Company believes its broad range of
competitive products, strong distributor relationships and diverse distribution network position it to compete effectively in the rapidly growing retirement savings market under various economic conditions.



As of December 31, 2007 and 2006, the Company did not
have a significant concentration of financial instruments in a single investee, industry or geographic region of the U.S. Also, the Company did not have a concentration of business transactions with a particular customer, lender, distribution
source, market or geographic region of the U.S. in which business is conducted that makes it overly vulnerable to a single event which could cause a severe impact to the Companys financial position.



The 46.7 million shares of Class A common stock
outstanding as of December 31, 2007 are publicly held and primarily were issued through NFS initial public offering completed in March 1997 and in conjunction with the acquisition of NFN in October 2002. The Class A shares represent
33.7% of the equity ownership in NFS and 4.8% of the combined voting power of NFS Class A and Class B common stock as of December 31, 2007. Nationwide Corporation (Nationwide Corp.), a majority-owned subsidiary of NMIC, owns all of
the outstanding shares of Class B common stock, which represents the remaining 66.3% equity ownership and 95.2% of the combined voting power of the shareholders of NFS as of December 31, 2007.



(2) Summary of Significant Accounting Policies



The Companys significant accounting policies that
materially affect financial reporting are summarized below. The accompanying consolidated financial statements were prepared in accordance with United States generally accepted accounting principles (GAAP).



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



The preparation of financial statements in accordance with GAAP requires management
to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ significantly from those estimates.



The Companys most critical estimates include those used to determine the following: the balance, recoverability and amortization
of deferred policy acquisition costs (DAC) for investment and universal life insurance products; impairment losses on investments; valuation allowances for mortgage loans on real estate; the liability for future policy benefits and claims; and
federal income tax provision. Although some variability is inherent in these estimates, recorded amounts reflect managements best estimates based on facts and circumstances as of the balance sheet date. Management believes the amounts provided
are appropriate.



The Company determined that
certain cash flows related to Nationwide Banks merger with Nationwide Federal Credit Union totaling $278.4 million and $245.1 million for the three months ended March 31, 2007 and the six months ended June 30, 2007, respectively,
which were included as cash flows provided by operating activities on the condensed consolidated statements of cash flows in the applicable Quarterly Reports on Form 10-Q, should be presented as investing and financing activities. These cash flows
will be presented in that manner on a comparative basis in the 2008 filings.



Certain items in the 2006 and 2005 consolidated financial statements and related notes have been reclassified to conform to the current presentation.



(a) Consolidation Policy



The consolidated financial statements include the accounts of NFS and companies in which NFS directly or indirectly has a controlling
financial interest. Minority interest expense is included in other operating expenses in the consolidated statements of income, and minority interest is included in other liabilities on the consolidated balance sheets. All significant intercompany
balances and transactions were eliminated.



(b) Valuation of
Investments, Investment Income and Related Gains and Losses



The Company is required to classify its fixed maturity securities and marketable equity securities as held-to-maturity, available-for-sale or trading. Trading assets may include any combination of fixed maturity
securities and marketable equity securities. Trading assets are stated at fair value, with changes in fair value recorded as a component of net realized investment gains and losses. All other fixed maturity and marketable equity securities are
classified as available-for-sale. Available-for-sale securities are stated at fair value, with unrealized gains and losses, net of adjustments to DAC, value of business acquired (VOBA), future policy benefits and claims, policyholder dividend
obligation and deferred federal income taxes reported as a separate component of accumulated other comprehensive income (AOCI) in shareholders equity. The adjustments to DAC and VOBA represent the changes in amortization of DAC and VOBA that
would have been required as a charge or credit to operations had such unrealized amounts been realized and allocated to the product lines. The adjustment to future policy benefits and claims represents the increase in policy reserves from using a
discount rate that would have been required had such unrealized amounts been realized and the proceeds reinvested at then current market interest rates, which were lower than the then current effective portfolio rate.



The fair value of fixed maturity and marketable equity
securities is generally obtained from independent pricing services based on market quotations. For fixed maturity securities not priced by independent services (generally private placement securities), an internally developed pricing model or
corporate pricing matrix is



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



most often used. The corporate pricing matrix is developed by obtaining private spreads versus the U.S. Treasury yield for corporate securities with varying
weighted average lives and bond ratings. The weighted average life and bond rating of a particular fixed maturity security to be priced using the corporate matrix are important inputs into the model and are used to determine a corresponding spread
that is added to the U.S. Treasury yield to create an estimated market yield for that bond. The estimated market yield and other relevant factors are then used to estimate the fair value of the particular fixed maturity security. Additionally, a
structured product model is used to value certain fixed maturity securities with complex cash flows, such as certain mortgage-backed and asset-backed securities. The structured product model uses third party pricing tools. For securities
for which quoted market prices are not available and for which the Companys structured product model is not suitable for estimating fair values, fair values are determined using other modeling techniques, primarily a commercial software
application utilized in valuing complex securitized investments with variable cash flows. The company also utilized broker quotes in pricing securities or to validate modeled prices. As of December 31, 2007, 71% of the fair values of fixed
maturity securities were obtained from independent pricing services, 16% from the Companys pricing matrices and 13% from other sources, compared to 72%, 19% and 9%, respectively, as of December 31, 2006.



Management regularly reviews each investment in its fixed
maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments.



For debt and equity securities not subject to Emerging Issues Task Force Issue No. 99-20,
Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets (EITF 99-20), an other-than-temporary impairment charge is taken when the Company does not have the ability and
intent to hold the security until the forecasted recovery or if it is no longer probable that the Company will recover all amounts due under the contractual terms of the security. Many criteria are considered during this process including, but not
limited to, the current fair value as compared to cost or amortized cost, as appropriate, of the security; the amount and length of time a securitys fair value has been below cost or amortized cost; specific credit issues and financial
prospects related to the issuer; managements intent to hold or dispose of the security; and current economic conditions. Other-than-temporary impairment losses result in a permanent reduction to the cost basis of the underlying investment.



In addition to the above, for certain
securitized financial assets with contractual cash flows, including asset-backed securities, EITF 99-20 also requires the Company to periodically update its best estimate of cash flows over the life of the security. If the fair value of a
securitized financial asset is not greater than or equal to its carrying value based on current information and events, and if there has been an adverse change in estimated cash flows since the last revised estimate (considering both timing and
amount), then the Company recognizes an other-than-temporary impairment and writes down the investment to fair value.



For mortgage-backed securities, the Company recognizes income using a constant effective yield method based on prepayment assumptions and
the estimated economic life of the securities. When estimated prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. Any resulting
adjustment is included in net investment income. All other investment income is recorded using the interest method without anticipating the impact of prepayments.



The Company provides valuation allowances for impairments of mortgage loans on real estate based on a review
by portfolio managers. Mortgage loans on real estate are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan
agreement. When management determines that a loan is impaired, a provision for



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



loss is established equal to either the difference between the carrying value and the present value of expected future cash flows discounted at the
loans effective interest rate or the fair value of the collateral if the loan is collateral dependent. In addition to the valuation allowance on specific loans, the Company maintains an allowance not yet specifically identified by loan for
probable losses inherent in the loan portfolio as of the balance sheet date. The valuation allowance account for mortgage loans on real estate reflects managements best estimate of probable credit losses, including losses incurred at the
balance sheet date but not yet identified by specific loan. Managements periodic evaluation of the adequacy of the allowance for losses is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrowers ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. Changes in the valuation allowance are recorded in net
realized investment gains and losses. Loans in foreclosure are placed on non-accrual status. Interest received on non-accrual status mortgage loans on real estate is included in net investment income in the period received.



The Company grants mainly commercial mortgage loans on real
estate to customers throughout the U.S. As of December 31, 2007, the Companys largest exposure to any single borrower, region and property type was 2%, 23% and 33%, respectively, of the Companys general account mortgage loan
portfolio, compared to 3%, 25% and 34%, respectively, as of December 31, 2006.



Real estate to be held and used is carried at cost less accumulated depreciation. Real estate designated as held for disposal is not depreciated and is carried at the lower of the carrying value
at the time of such designation or fair value less cost to sell. Other long-term investments are carried on the equity method of accounting.



Impairment losses are recorded on investments in long-lived assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts.



Realized gains and losses on the sale of investments are determined on the basis of specific security identification. Changes in the
Companys mortgage loan valuation allowance and recognition of impairment losses for other-than-temporary declines in the fair values of applicable investments are included in net realized investment gains and losses.



(c) Derivative Instruments



Derivatives are carried at fair value. On the date a
derivative contract is entered into, the Company designates the derivative as a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge); a hedge of a forecasted transaction or the
variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge); a foreign currency fair value or cash flow hedge (foreign currency hedge); or a non-hedge transaction. The Company formally documents all
relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for entering into various hedge transactions. This process includes linking all derivatives that are designated as fair value, cash
flow or foreign currency hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedges inception and on an ongoing basis,
whether the derivatives that are used for hedging transactions are expected to be and, for ongoing hedging relationships, have been highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a
derivative is not, or is not expected to be, highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



The Company enters into interest rate swaps, cross-currency swaps or Euro futures to
hedge the fair value of existing fixed rate assets and liabilities. In addition, the Company uses short U.S. Treasury future positions to hedge the fair value of bond and mortgage loan commitments. Typically, the Company is hedging the risk of
changes in fair value attributable to changes in benchmark interest rates. Derivative instruments classified as fair value hedges are carried at fair value, with changes in fair value recorded in net realized investment gains and losses. Changes in
the fair value of the hedged item that are attributable to the risk being hedged are also recorded in net realized investment gains and losses.



Accrued interest receivable or payable under interest rate and foreign currency swaps are recognized as an adjustment to net investment
income or interest credited to policyholder accounts consistent with the nature of the hedged item, except for interest rate swaps hedging the anticipated sale of investments where amounts receivable or payable under the swaps are recorded as net
realized investment gains and losses, and except for interest rate swaps hedging the anticipated purchase of investments where amounts receivable or payable under the swaps are initially recorded in AOCI to the extent the hedging relationship is
effective.



The Company periodically may enter
into a derivative transaction that will not qualify for hedge accounting. The Company does not enter into speculative positions. Although these transactions do not qualify for hedge accounting, or have not been designated in hedging relationships by
the Company, they are part of its overall risk management strategy. For example, the Company may sell credit default protection through a credit default swap. Although the credit default swap is not effective in hedging specific investments, the
income stream allows the Company to manage overall investment yields while exposing the Company to acceptable credit risk. The Company may enter into a cross-currency basis swap (pay a variable U.S. rate and receive a variable foreign-denominated
rate) to eliminate the foreign currency exposure of a variable rate foreign-denominated liability. Although basis swaps may qualify for hedge accounting, the Company has chosen not to designate these derivatives as hedging instruments due to the
difficulty in assessing and monitoring effectiveness for both sides of the basis swap. Derivative instruments that do not qualify for hedge accounting or are not designated as hedging instruments are carried at fair value, with changes in fair value
recorded in net realized investment gains and losses.



(d)
Revenues and Benefits



Investment and
Universal Life Insurance Products: Investment products consist primarily of individual and group variable and fixed deferred annuities. Universal life insurance products include universal life insurance, variable universal life insurance,
corporate-owned life insurance (COLI), bank-owned life insurance (BOLI) and other interest-sensitive life insurance policies. Revenues for investment products and universal life insurance products consist of net investment income, asset fees, cost
of insurance charges, administrative fees and surrender charges that have been earned and assessed against policy account balances during the period. The timing of revenue recognition as it relates to fees assessed on investment contracts and
universal life contracts is determined based on the nature of such fees. Asset fees, cost of insurance charges and administrative fees are



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



assessed on a daily or monthly basis and recognized as revenue when assessed and earned. Certain amounts assessed that represent compensation for services to
be provided in future periods are reported as unearned revenue and recognized in income over the periods benefited. Surrender charges are recognized upon surrender of a contract in accordance with contractual terms. Policy benefits and claims that
are charged to expense include interest credited to policyholder accounts and benefits and claims incurred in the period in excess of related policyholder accounts.



Traditional Life Insurance Products: Traditional life insurance products include those products with
fixed and guaranteed premiums and benefits and primarily consist of whole life insurance, limited-payment life insurance, term life insurance and certain annuities with life contingencies. Premiums for traditional life insurance products generally
are recognized as revenue when due. Benefits and expenses are associated with earned premiums so that profits are recognized over the life of the contract. This association is accomplished through the provision for future policy benefits and the
deferral and amortization of policy acquisition costs.



(e)
Deferred Policy Acquisition Costs for Investment and Universal Life Insurance Products



The Company has deferred certain costs of acquiring investment and universal life insurance products business, principally commissions, certain expenses of the policy issue and underwriting
department, and certain variable sales expenses that relate to and vary with the production of new and renewal business. In addition, the Company defers sales inducements, such as interest credit bonuses and jumbo deposit bonuses. Investment
products primarily consist of individual and group variable and fixed deferred annuities in the Individual Investments and Retirement Plans segments. Universal life insurance products include universal life insurance, variable universal life
insurance, COLI, BOLI and other interest-sensitive life insurance policies in the Individual Protection segment. DAC is subject to recoverability testing in the year of policy issuance and loss recognition testing at the end of each reporting
period.



For investment and universal life
insurance products, DAC is being amortized with interest over the lives of the policies in relation to the present value of estimated gross profits from projected interest margins, asset fees, cost of insurance charges, administration fees,
surrender charges, and net realized investment gains and losses less policy benefits and policy maintenance expenses. The DAC asset related to investment and universal life insurance products is adjusted to reflect the impact of unrealized gains and
losses on fixed maturity securities available-for-sale, as described in Note 2(b) to the audited consolidated financial statements included in the F pages of this report.



The assumptions used in the estimation of future gross profits are based on the Companys current best estimates of
future events and are reviewed as part of an annual process during the second quarter. During the annual process, the Company performs a comprehensive study of assumptions, including mortality and persistency studies, maintenance expense studies,
and an evaluation of projected general and separate account investment returns. The most significant assumptions that are involved in the estimation of future gross profits include future net separate account investment performance, surrender/lapse
rates, interest margins and mortality. Currently, the Companys long-term assumption for net separate account investment performance is approximately 7% growth per year and varies by product. This assumption, like others, is reviewed as part of
the annual process. If this assumption were unlocked, the date of the unlocking could become the anchor date used in the reversion to the mean process (defined below). Variances from the long-term assumption are expected since the majority of the
investments in the underlying separate accounts are in equity securities, which strongly correlate with the Standard & Poors (S&P) 500 Index in the aggregate. The reversion to the mean process is based on actual net separate
account investment performance from the anchor date to the valuation date. The Company then assumes different performance levels over the next three years such that the separate account



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



mean return measured from the anchor date to the end of the life of the product equals the long-term assumption. The assumed net separate account investment
performance used in the DAC models is intended to reflect what is anticipated. However, based on historical returns of the S&P 500 Index, and as part of its pre-set parameters, the Companys reversion to the mean process generally limits
net separate account investment performance to 0-15% during the three-year reversion period. See below for a discussion of current year assumption changes.



Changes in assumptions can have a significant impact on the amount of DAC reported for investment and universal life insurance products
and their related amortization patterns. In the event actual experience differs from assumptions or future assumptions are revised, the Company is required to record an increase or decrease in DAC amortization expense, which could be significant. In
general, increases in the estimated long-term general and separate account returns result in increased expected future profitability and may lower the rate of DAC amortization, while increases in long-term lapse/surrender and mortality assumptions
reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization.



In addition to the comprehensive annual study of assumptions, management evaluates the appropriateness of the individual variable annuity
DAC balance quarterly within pre-set parameters. These parameters are designed to appropriately reflect the Companys long-term expectations with respect to individual variable annuity contracts while also evaluating the potential impact of
short-term experience on the Companys recorded individual variable annuity DAC balance. If the recorded balance of individual variable annuity DAC falls outside of these parameters for a prescribed time period, or if the recorded balance falls
outside of these parameters and management determines it is not reasonably possible to get back within the parameters during this time period, assumptions are required to be unlocked, and DAC is recalculated using revised best estimate assumptions.
When DAC assumptions are unlocked and revised, the Company continues to use the reversion to the mean process. See below for a discussion of current year assumption changes.



At the end of the second quarter of 2007, the Company determined as part of its analysis of DAC that the
overall profitability of separate account products is expected to exceed previous estimates due to favorable financial market trends. Accordingly, the Company unlocked its DAC assumptions after completing a comprehensive review of assumptions used
to project DAC and other related balances, including sales inducement assets, VOBA, unearned revenue reserves, and guaranteed minimum death and income benefit reserves. This review covered all assumptions including expected separate account
investment returns, lapse rates, mortality and expenses. Additionally, while the Company estimates that the overall profitability of its variable products has improved, it also expects the long-term net growth in separate account investment
performance to moderate. As a result of its current analysis, including its evaluation of ongoing trends and expectations regarding financial market performance, the Company reduced its long-term net separate account growth rate assumption from
approximately 8% to approximately 7%. The Company unlocked assumptions, as appropriate, for all investment products and variable universal life insurance products in order to remain consistent across product lines using revised assumptions which
reflect the Companys current best estimate of future events. Therefore, in the second quarter of 2007, the Company recorded a net increase in DAC and a benefit to DAC amortization and other related balances totaling $216.5 million pre-tax,
which was reported in the following segments in the pre-tax amounts indicated: Individual Investments$196.4 million; Retirement Plans$10.5 million; and Individual Protection$9.6 million, net of a $5.1 million charge for the
acceleration of amortization of VOBA.



The most
significant assumption changes that resulted from the Companys unlocking decisions were resetting the anchor date for reversion to the mean calculations to June 30, 2007, resulting in resetting the assumption for net separate account
growth to approximately 7% during the three-year reversion period; resetting



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



the long-term assumption for net separate account growth and the discount rate used to calculate the present value of estimated gross profits to
approximately 7% (formerly approximately 8%); and increasing estimated lapse rates for fixed annuity and BOLI products.



During the second quarter of 2007, the Company added a new feature to its existing guaranteed minimum withdrawal benefit rider, Lifetime
Income (L.inc). This new feature results in a substantial change in the existing contracts and, therefore, an extinguishment of the DAC associated with those contracts pursuant to Statement of Position 05-1, Accounting by Insurance Enterprises
for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts. As a result, existing DAC and other related balances were eliminated resulting in a $135.0 million pre-tax charge.



(f) Value of Business Acquired and Other Intangible Assets



As a result of the acquisition of NFN in 2002 and the
application of purchase accounting, the Company reports an intangible asset representing the estimated fair value of the business in force and the portion of the purchase price that was allocated to the value of the right to receive future cash
flows from the life insurance and annuity contracts existing as of the closing date of the NFN acquisition. The value assigned to VOBA was supported by an independent valuation study commissioned by the Company and executed by a team of qualified
valuation experts, including actuarial consultants. The expected future cash flows used in determining such value were based on actuarially determined projections by major lines of business of future policy and contract charges, premiums, mortality
and morbidity, separate account performance, surrenders, changes in reserves, operating expenses, investment income and other factors. These projections considered all known or expected factors at the valuation date based on the judgment of
management. The actual experience on purchased business, to some extent, has and may continue to vary from projections due to differences in renewal premiums, investment spreads, investment gains and losses, mortality and morbidity costs, or other
factors.



Amortization of VOBA occurs with
interest over the anticipated lives of the major lines of business to which it relates (initially ranging from 13 to 30 years) in relation to estimated gross profits, gross margins or premiums, as appropriate. If estimated gross profits, gross
margins or premiums differ from expectations, the amortization of VOBA is adjusted on a retrospective or prospective basis, as appropriate. The VOBA asset related to investment products and universal life insurance products is adjusted annually for
the impact of net unrealized gains and losses on securities available-for-sale had such gains and losses been realized and allocated to the product lines, as described in Note 2(b). The recoverability of VOBA is evaluated annually. If the evaluation
indicates that the existing insurance liabilities, together with the present value of future net cash flows from the blocks of business acquired, is insufficient to recover VOBA, the difference, if any, is charged to expense as accelerated
amortization of VOBA.



For those products
amortized in relation to estimated gross profits, the most significant assumptions involved in the estimation of future gross profits include future net separate account performance, surrender/lapse rates, interest margins and mortality. The
Companys long-term assumption for net separate account performance is currently 7%. If actual net separate account performance varies from the 7% assumption, the Company assumes different performance levels over the next three years such that
the mean return equals the long-term assumption. The assumed net separate account return assumptions used in the VOBA models are intended to reflect what is anticipated. However, based on historical returns of the S&P 500 Index, the
Companys reversion to the mean process generally limits returns to 0-15% during the three-year reversion period.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



Changes in assumptions can have a significant impact on the amount of VOBA reported
for all products and their related amortization patterns. In the event actual experience differs from assumptions or assumptions are revised, the Company is required to record an increase or decrease in VOBA amortization expense (VOBA unlocking),
which could be significant. In general, increases in the estimated long-term general and separate account returns result in increased expected future profitability and may lower the rate of VOBA amortization, while increases in long-term
lapse/surrender and mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of VOBA amortization.



The use of discount rates was necessary to establish fair values of VOBA and other intangible assets acquired in the NFN transaction. In
selecting the appropriate discount rates, management considered its weighted average cost of capital as well as the weighted average cost of capital required by market participants. In addition, consideration was given to the perceived risk of the
assets acquired, which includes the expected growth and competitive profile of the life insurance market and the nature of the assumptions used in the valuation process. An after-tax discount rate of 11.0% was used to value VOBA, while after-tax
discount rates ranging from 11.0% to 12.5% were used to value the other intangible assets acquired in the NFN transaction, as well as for net realized gains and losses, net of taxes, allocated to the closed block.



Intangible assets include NFNs career agency force,
independent agency force, retirement services distribution channel, state licenses and certain other contracts and relationships. These intangible assets have been assigned values using various methodologies, including present value of projected
future cash flows, analysis of similar transactions that have occurred or could be expected to occur in the market, and replacement or reproduction cost. Other factors considered in the valuation include the relative risk profile of each asset, the
deterioration of the economic life, and the enhancement to other associated assets. The initial valuations of these intangible assets were also supported by an independent valuation study that was commissioned by the Company and executed by
qualified valuation experts.



The other
identified intangible assets with finite lives are amortized over their estimated useful lives, which initially ranged from 5 to 22 years (weighted average 19 years), primarily based on the cash flows generated by these assets.



(g) Goodwill



In connection with acquisitions of operating entities, the
Company recognizes the excess of the purchase price over the fair value of net assets acquired as goodwill. Goodwill is not amortized, but is evaluated for impairment at the reporting unit level annually in the third quarter. Goodwill of a reporting
unit also is tested for impairment on an interim basis in addition to the annual evaluation if an event occurs or circumstances change which would more likely than not reduce the fair value of a reporting unit below its carrying amount.



The process of evaluating goodwill for impairment requires
several judgments and assumptions to be made to determine the fair value of the reporting units, including the method used to determine fair value; discount rates; expected levels of cash flows, revenues and earnings; and the selection of comparable
companies used to develop market-based assumptions.



During the quarter ended September 30, 2006, the Company changed the timing of its annual goodwill impairment testing from the fourth quarter (based on September 30 financial information) to the third quarter (based on
June 30 financial information). This change allows the Company to complete its annual goodwill impairment testing prior to its year-end closing activities for the current year and annual financial planning for



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



the subsequent year. In addition, this change did not delay, accelerate or avoid an impairment charge. Accordingly, management believes that the accounting
change described above is preferable under the circumstances.



(h) Closed Block



In
connection with the sponsored demutualization of Provident Mutual Life Insurance Company (Provident) prior to its acquisition by the Company, Provident established a closed block for the benefit of certain classes of individual participating
policies that had a dividend scale payable in 2001. Assets were allocated to the closed block in an amount that produces cash flows which, together with anticipated revenues from closed block business, is reasonably expected to be sufficient to
provide for (1) payment of policy benefits, specified expenses and taxes, and (2) the continuation of dividends throughout the life of the Provident policies included in the closed block based upon the dividend scales payable for 2001, if
the experience underlying such dividend scales continues.



Assets allocated to the closed block benefit only the holders of the policies included in the closed block and will not revert to the benefit of the Company. No reallocation, transfer, borrowing or lending of assets
can be made between the closed block and other portions of the Companys general account, any of its separate accounts, or any affiliate of the Company without the approval of the Pennsylvania Insurance Department (PID). The closed block will
remain in effect as long as any policy in the closed block is in force.



If, over time, the aggregate performance of the closed block assets and policies is better than was assumed in funding the closed block, dividends to policyholders will increase. If, over time, the aggregate
performance of the closed block assets and policies is less favorable than was assumed in the funding, dividends to policyholders could be reduced. If the closed block has insufficient funds to make guaranteed policy benefit payments, such payments
will be made from the Companys assets outside of the closed block, which are general account assets.



The assets and liabilities allocated to the closed block are recorded in the Companys consolidated financial statements on the same
basis as other similar assets and liabilities. The carrying amount of closed block liabilities in excess of the carrying amount of closed block assets at the date Provident was acquired by the Company represents the maximum future earnings from the
assets and liabilities designated to the closed block that can be recognized in income, for the benefit of stockholders, over the period the policies in the closed block remain in force.



If actual cumulative earnings exceed expected cumulative earnings, the expected earnings are recognized in
income. This is because the excess cumulative earnings over expected cumulative earnings, which represents undistributed accumulated earnings attributable to policyholders, is recorded as a policyholder dividend obligation. Therefore, the excess
will be paid to closed block policyholders as an additional policyholder dividend in the future unless it is otherwise offset by future performance of the closed block that is less favorable than originally expected. If actual cumulative performance
is less favorable than expected, actual earnings will be recognized in income.



The principal cash flow items that affect the amount of closed block assets and liabilities are premiums, net investment income, purchases and sales of investments, policyholder benefits, policyholder dividends,
premium taxes and income taxes. The principal income and expense items excluded from the closed block are management and maintenance expenses, commissions, net investment income, and realized gains and losses on investments held outside of the
closed block that support the closed block business, all of which enter into the determination of total gross margins of closed block policies for the purpose of the amortization of VOBA.



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



(i) Separate Accounts



Separate account assets and liabilities represent contractholders funds that have been legally
segregated into accounts with specific investment objectives. Separate account assets are recorded at fair value based primarily on market quotations of the underlying securities. Investment income and realized investment gains or losses of these
accounts accrue directly to the contractholders. The activity of the separate accounts is not reflected in the consolidated statements of income except for (1) the fees the Company receives, which are assessed on a daily or monthly basis and
recognized as revenue when assessed and earned, and (2) the activity related to contract guarantees, which are riders to existing variable annuity contracts.



(j) Future Policy Benefits and Claims



The process of calculating reserve amounts for a life insurance organization involves the use of a number of assumptions,
including those related to persistency (how long a contract stays with a company), mortality (the relative incidence of death in a given time), morbidity (the relative incidence of disability resulting from disease or physical impairment) and
interest rates (the rates expected to be paid or received on financial instruments, including insurance or investment contracts).



The Company calculates its liability for future policy benefits and claims for investment products in the accumulation phase and universal
life and variable universal life insurance policies as the policy account balance, which represents participants net premiums and deposits plus investment performance and interest credited less applicable contract charges.



The Companys liability for funding agreements to an
unrelated third party trust related to the Companys medium-term note (MTN) program equals the balance that accrues to the benefit of the contractholder, including interest credited. The funding agreements constitute insurance obligations and
are considered annuity contracts under Ohio insurance laws.



The liability for future policy benefits and claims for traditional life insurance policies was determined using the net level premium method using interest rates varying from 2.0% to 10.5% and estimates of mortality,
morbidity, investment yields and withdrawals that were used or being experienced at the time the policies were issued.



The liability for future policy benefits for payout annuities was calculated using the present value of future benefits and maintenance
costs discounted using interest rates varying generally from 3.0% to 13.0%.



(k) Participating Business



Participating business, which refers to policies that participate in profits through policyholder dividends, represented approximately 6% of the Companys life insurance in force in 2007 (8% in 2006 and 10% in
2005), 56% of the number of life insurance policies in force in 2007 (60% in 2006 and 62% in 2005) and 12% of life insurance statutory premiums in 2007 (8% in 2006 and 9% in 2005). The provision for policyholder dividends was based on then current
dividend scales and has been included in future policy benefits and claims in the consolidated balance sheets.



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



(l) Federal Income Taxes



The Company provides for federal income taxes based on amounts the Company believes it ultimately will owe.
Inherent in the provision for federal income taxes are estimates regarding the deductibility of certain items and the realization of certain tax credits. In the event the ultimate deductibility of certain items or the realization of certain tax
credits differs from estimates, the Company may be required to significantly change the provision for federal income taxes recorded in the consolidated financial statements. Any such change could significantly affect the amounts reported in the
consolidated statements of income. Management has established reserves in accordance with FIN 48 based on current facts and circumstances regarding tax exposure items where the ultimate deductibility is open to interpretation. Management evaluates
the appropriateness of such reserves quarterly based on any new developments specific to their fact patterns. Information considered includes results of completed tax examinations, Technical Advice Memorandums and other rulings issued by the
Internal Revenue Service (IRS) or the tax courts.



The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when it is determined that it is more likely than not that the deferred tax asset will not be fully realized.



(m) Reinsurance Ceded



Reinsurance premiums ceded and reinsurance recoveries on benefits and claims incurred are deducted from the respective income and expense
accounts. Assets and liabilities related to reinsurance ceded are reported in the consolidated balance sheets on a gross basis, separately from the related future policy benefits and claims of the Company.



(n) Discontinued Operations



During the quarter ended December 31, 2007, the Company
committed to a plan of sale of its interest in TBG Financial. Based on managements determination that the carrying value of this business exceeded its estimated fair value (less the estimated cost to sell), the Company recorded a pre-tax loss
totaling $49.0 million ($23.3 million, net of taxes), writing down a portion of the goodwill associated with this business. TBG Financial is engaged in the distribution of COLI and BOLI products primarily to large companies. Upon finalization of the
sale of its interest in TBG Financial, NFS will no longer be engaged in the distribution of COLI and BOLI products. However, NFS will continue its manufacturing capabilities in this market. Accordingly, the results of operations of TBG Financial for
all years presented and the 2007 loss related to measuring the disposal group at fair value less cost to sell are reflected as discontinued in the consolidated statements of income.



Effective March 31, 2007, the Company completed the sale of The 401(k) Company for $115.4 million in
cash and recorded a $45.5 million gain, net of taxes. The 401(k) Company provides administrative and record-keeping services to employers in the private sector for use in Internal Revenue Code (IRC) Section 401(k) retirement programs. Since
this sale represents the Companys exit from the large plan 401(k) market, the results of operations of The 401(k) Company and the gain on sale are reflected as discontinued in the consolidated statements of income.



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



During the year ended December 31, 2005, the Company discontinued the following
operations: (1) Cap Pro Holding, Inc. (Cap Pro), a majority-owned subsidiary of NFS that provided broker/dealer, registered investment advisor and insurance agency services to producers of certain certified public accounting firms;
(2) Nationwide Financial Services (Bermuda), Ltd. (NFSB), a wholly-owned subsidiary of NFS that sold variable and fixed annuity products in offshore markets; and (3) William J. Lynch & Associates, Inc. (TBG Lynch), a wholly-owned
subsidiary of TBG Financial that distributed BOLI products.



The Companys 2005 loss on discontinued operations, net of taxes, primarily consists of the following: (1) Cap Pro$4.5 million; (2) NFSB$8.3 million; and (3) TBG Lynch$11.7
million. The results of operations of Cap Pro, NFSB and TBG Lynch are reflected as discontinued for 2005.



During the quarter ended June 30, 2005, the Company decided to dispose of Cap Pro. The 2005 loss on discontinued operations related
to Cap Pro primarily was due to a $10.8 million pre-tax goodwill impairment charge.



During December 2005, the Company sold its NFSB operations for $48.0 million in cash. The Company recorded a loss on the sale of $7.8 million, net of taxes.



Also in December 2005, the Company entered into an agreement
to sell its TBG Lynch operations for a total of $10.2 million in cash and other consideration. As a result, the Company recorded a loss on the planned transaction of $11.7 million, net of taxes, primarily driven by the write-off of goodwill. The
sale was finalized in February 2006.



(o) Nationwide Funds
Group Acquisition



On February 2,
2007, NFS entered into a stock purchase agreement with Nationwide Corp. to acquire the Philadelphia-based retail asset management operations of NWD Investment Management, Inc. (NWD). The transaction closed on April 30, 2007 with a final
purchase price of $244.2 million. NWD is now known as NFG. The purchase was accounted for at historical cost in a manner similar to a pooling of interests because the involved entities are under common control. NFG is reflected in the Companys
current and prior year consolidated financial statements at the historical cost of the transferred net assets to provide comparative information as though the companies were combined for all periods presented. The excess purchase price over the
historical cost of the acquired net assets was accounted for as a $202.5 million equity transaction. In addition, NFG paid a $42.0 million dividend to Nationwide Corp. during the second quarter of 2007 but prior to the acquisition date.



(p) Change in Accounting Principle



Historically, the Company accrued for legal costs associated
with litigation defense and regulatory investigations by estimating the ultimate costs of such activity. Beginning April 1, 2007, the Companys accrual for such legal expenses includes only the amount for services that have been provided
but not yet paid. The Company believes the newly adopted accounting principle is preferable because it more accurately reflects expenses in the periods in which they are incurred. The Company continues to estimate and accrue the ultimate amounts
expected to be paid for litigation and regulatory investigation loss contingencies.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



(q) Summary of Impact of NFG Acquisition and Change in Accounting Principle



The Company has presented its consolidated financial
statements and accompanying notes as applicable for all years presented to reflect the NFG acquisition and to retroactively apply the adoption of the change in accounting principle described above.



The following tables summarize the impact of the items
described above for the years ended December 31:



|                                        |  |                |       |                              |   |       |       |  |   |      
|--------------------------------------- |  | -------------- | ----- | ---------------------------- | - | ----- | ----- |  | - | -----
|(in millions, except per share amounts) |  | NFGAcquisition |       | Change inAccountingPrinciple |   |       | Total
|2007                                    |  |                |       |                              |   |       |       |  |   |      
|Net investment income                   |  | $              | 1.8   |                              | $ |      |       |  | $ | 1.8  
|Other income                            |  |                | 213.2 |                              |   |      |       |  |   | 213.2
|Other operating expenses                |  |                | 165.5 |                              |   | 1.9   |       |  |   | 167.4
|Net income                              |  |                | 44.9  |                              |   | (1.2  | )     |  |   | 43.7 
|                                        |  |                |      
|Earnings per common share:              |  |                |       |                              |   |       |       |  |   |      
|Basic                                   |  | $              | 0.32  |                              | $ | (0.01 | )     |  | $ | 0.31 
|Diluted                                 |  |                | 0.31  |                              |   | (0.01 | )     |  |   | 0.30 
|                                        |  |                |      
|2006                                    |  |                |       |                              |   |       |       |  |   |      
|Net investment income                   |  | $              | 0.9   |                              | $ |      |       |  | $ | 0.9  
|Other income                            |  |                | 171.4 |                              |   |      |       |  |   | 171.4
|Other operating expenses                |  |                | 152.3 |                              |   | 4.2   |       |  |   | 156.5
|Net income                              |  |                | 12.9  |                              |   | (2.7  | )     |  |   | 10.2 
|                                        |  |                |      
|Earnings per common share:              |  |                |       |                              |   |       |       |  |   |      
|Basic                                   |  | $              | 0.09  |                              | $ | (0.02 | )     |  | $ | 0.07 
|Diluted                                 |  |                | 0.09  |                              |   | (0.02 | )     |  |   | 0.07 
|                                        |  |                |      
|2005                                    |  |                |       |                              |   |       |       |  |   |      
|Net investment income                   |  | $              | 0.2   |                              | $ |      |       |  | $ | 0.2  
|Other income                            |  |                | 137.6 |                              |   |      |       |  |   | 137.6
|Other operating expenses                |  |                | 119.2 |                              |   | 0.6   |       |  |   | 119.8
|Net income                              |  |                | 12.1  |                              |   | (0.4  | )     |  |   | 11.7 
|                                        |  |                |      
|Earnings per common share:              |  |                |       |                              |   |       |       |  |   |      
|Basic                                   |  | $              | 0.08  |                              | $ |      |       |  | $ | 0.08 
|Diluted                                 |  |                | 0.08  |                              |   |      |       |  |   | 0.08 



The
cumulative effect of the changes described above as of January 1, 2006 was an increase of $148.0 million to retained earnings and a decrease of $110.8 million to additional paid-in capital.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



(r) Share-Based Payments



Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004), Share-Based Payment(SFAS 123R), and began expensing, at fair value, the costs resulting from share-based payment transactions. The following table summarizes share-based payment expense for the years ended
December 31:



|                                          |  |      |      |      |   |     
|----------------------------------------- |  | ---- | ---- | ---- | - | ----
|(in millions, except per share amounts)   |  | 2007 |      | 2006
|Share-based payment expense               |  | $    | 9.4  |      | $ | 8.6 
|Share-based payment expense, net of taxes |  |      | 6.1  |      |   | 5.6 
|                                          |  |     
|Expense per common share, net of taxes:   |  |      |      |      |   |     
|Basic                                     |  | $    | 0.04 |      | $ | 0.04
|Diluted                                   |  |      | 0.04 |      |   | 0.04



Prior
to 2006, the Company elected to follow Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees(APB 25) and related interpretations in accounting for stock options granted to employees as permitted by
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), as amended by SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. Under APB 25, the Company did not recognize share-based
payment expense in its financial statements because the stock option awards qualified as fixed awards and the exercise price of the Companys employee stock options equaled the market price of the underlying stock on the date of grant.



The following table summarizes the effect on
net income and earnings per common share for the year ended December 31, 2005, if the Company had accounted for compensation cost for employee stock options in accordance with the fair value accounting method, as permitted by SFAS 123:



|                                                                                        |  |   |      
|--------------------------------------------------------------------------------------- |  | - | -----
|(in millions, except per share amounts)                                                
|Net income, as reported                                                                 |  | $ | 610.4
|Less total share-based payment expense determined under fair value method, net of taxes |  |   | 7.9  
|                                                                                        |  |   |      
|Pro forma net income                                                                    |  | $ | 602.5
|                                                                                        |  |   |      
|Earnings per common share:                                                              |  |   |      
|Basic, as reported                                                                      |  | $ | 3.99 
|Basic, pro forma                                                                        |  |   | 3.94 
|Diluted, as reported                                                                    |  |   | 3.97 
|Diluted, pro forma                                                                      |  |   | 3.92 



The
Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan (LTEP) covers selected employees, directors and agents of the Company and certain of its affiliates. The LTEP provides for the grant of any or all
of the following types of stock-based compensation awards: (1) stock options for shares of Class A common stock; (2) restricted stock; (3) stock-based Nationwide value added (NVA) awards; (4) stock appreciation rights
(SARs), either in tandem with stock options or freestanding; and (5) performance shares and performance units. The LTEP provides that it will remain in effect, subject to the right of the Companys Board of Directors to terminate it
sooner, until all shares subject to the LTEP have been delivered under awards. However, in no event may any LTEP award of incentive stock options be granted on or after February 27, 2012. The number of shares of Class A common stock that
may be issued under the LTEP, or as to which SARs or other awards may be granted, currently may not exceed 20.1 million. As of December 31, 2007, 12.5 million shares of Class A common stock options have been granted. Shares issued
upon option exercise are new shares not issued from treasury.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



Substantially all stock options (1) are non-qualified; (2) are granted with
an exercise price at least equal to the fair value of shares on the grant date; (3) have a ten-year term; and (4) vest and become exercisable at the rate of one-third on each annual anniversary date of a three-year period of continued
employment or upon retirement. Restricted stock awards are issued with a specific period of restriction varying by award as determined by the Compensation Committee of the Companys Board of Directors. As of December 31, 2007, there were
no outstanding NVA awards, SARs, performance shares or performance units payable in shares of Class A common stock.



The Nationwide Financial Services, Inc. Second Amended and Restated Stock Retainer Plan for Non-Employee Directors (Director Stock
Retainer Plan) covers non-employee directors of the Company. The Director Stock Retainer Plan provides that payment of all or a portion of the retainer payable to a member of the board of directors may be made in shares of Class A common stock
or in deferred stock units (DSUs). DSUs vest upon grant and are valued at the current fair value of the Companys Class A common stock. They will be settled in cash or stock, pursuant to the terms of the applicable award agreement, in the
January following the directors termination from the board. As of December 31, 2007, there were approximately 41,000 DSUs outstanding. All outstanding DSUs will be settled in cash.



The following table summarizes outstanding stock options for
the year ended December 31, 2007:



|                                      |  |                              |   |  |                              |      
|------------------------------------- |  | ---------------------------- | - |  | ---------------------------- | -----
|(options in millions)                 |  | Options onClass Acommonstock |   |  | Weightedaverageexerciseprice
|Outstanding, beginning of period      |  | 6.0                          |   |  | $                            | 36.88
|Granted                               |  | 0.6                          |   |  |                              | 55.02
|Exercised                             |  | (1.7                         | ) |  |                              | 37.25
|Cancelled                             |  | (0.2                         | ) |  |                              | 41.16
|                                      |  |                              |   |  |                              |      
|Outstanding, end of period            |  | 4.7                          |   |  |                              | 39.05
|                                      |  |                              |   |  |                              |      
|Vested and exercisable, end of period |  | 3.4                          |   |  | $                            | 35.80
|                                      |  |                              |   |  |                              |      



As of
December 31, 2007, vested and exercisable stock options had an aggregate intrinsic value of $32.0 million with a weighted average remaining contractual term of approximately 5 years. Stock options exercised during 2007 had an aggregate
intrinsic value of approximately $29.9 million.



The following table summarizes nonvested stock options for the year ended December 31, 2007:



|                               |  |                              |   |  |                                     |      
|------------------------------ |  | ---------------------------- | - |  | ----------------------------------- | -----
|(options in millions)          |  | Options onClass Acommonstock |   |  | Weightedaveragegrant datefair value
|Nonvested, beginning of period |  | 1.6                          |   |  | $                                   | 12.18
|Granted                        |  | 0.6                          |   |  |                                     | 15.61
|Vested                         |  | (0.8                         | ) |  |                                     | 11.66
|Cancelled                      |  | (0.1                         | ) |  |                                     | 12.39
|                               |  |                              |   |  |                                     |      
|Nonvested, end of period       |  | 1.3                          |   |  |                                     | 14.12
|                               |  |                              |   |  |                                     |      



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



As of December 31, 2007, the total share-based payment cost related to nonvested
stock options not yet recognized was approximately $9.9 million. The weighted average period over which this cost was expected to be recognized was approximately 1 year.



The fair values of stock options are estimated on the dates of grant using a Black-Scholes option-pricing model. In
accordance with Financial Accounting Standards Board (FASB) Staff Position (FSP) FAS 123R-2, Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123R (FSP FAS 123R-2), the total of 745,818 stock
options awarded by the Compensation Committee in February and March 2006 were not considered granted for accounting purposes until April 2006 when the awards were communicated to recipients. Accordingly, the fair values of these awards were not
estimated until the April 2006 effective grant date, and the related expense was recognized in the financial statements beginning in the second quarter of 2006.



The following table summarizes the weighted average fair value of options granted and assumptions used to determine the fair value of
options granted for the years ended December 31:



|                              |  |      |       |   |      |   |       |      |  |   |       |  
|----------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                              |  | 2007 |       |   | 2006 |   |       | 2005 | 
|Fair value of options granted |  | $    | 15.61 |   |      | $ | 14.06 |      |  | $ | 11.04 |  
|Dividend yield                |  |      | 1.89  | % |      |   | 2.11  | %    |  |   | 2.06  | %
|Expected volatility           |  |      | 27.14 | % |      |   | 31.88 | %    |  |   | 32.78 | %
|Risk-free interest rate       |  |      | 4.70  | % |      |   | 4.92  | %    |  |   | 3.78  | %
|Expected life (years)         |  |      | 5.7   |   |      |   | 5.9   |      |  |   | 5.5   |  



The
dividend yield was estimated considering current dividends and stock prices. Expected volatility was estimated using a weighted average of the Companys historical actual experience. The risk-free interest rate was estimated based on a U.S.
Treasury Bond yield with a remaining term approximating that of the expected option life. The expected option life was estimated using a weighted average of the Companys actual experience assuming that outstanding options were exercised at the
midpoint of the remaining term.



(3) Recently Issued Accounting Standards



In December 2007, the FASB issued SFAS
No. 141 (revised 2007), Business Combinations(SFAS 141R), which replaces SFAS No. 141, Business Combinations(SFAS 141). The objective of SFAS 141R is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. Accordingly, SFAS 141R establishes principles and requirements for how the acquirer: 1) recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; 2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase;
and 3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R applies to all transactions or other events in which an entity obtains
control of one or more businesses and retains the fundamental requirements in SFAS 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R
defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. SFAS 141R is applicable prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier application is prohibited. The Company currently is evaluating the impact of adopting
SFAS 141R.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51(SFAS 160). The objective of SFAS 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its
consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 also amends certain consolidation procedures prescribed by
Accounting Research Bulletin No. 51, Consolidated Financial Statements, for consistency with the requirements of SFAS 141R. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. The Company currently is evaluating the impact of adopting SFAS 160.



In June 2007, the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies (SOP 07-1). SOP
07-1 provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide Investment Companies (the Guide). For those entities that are investment companies under SOP 07-1, this SOP also addresses whether
the specialized industry accounting principles of the Guide (i.e., fair value accounting) should be retained by a parent company in consolidation or by an investor that has the ability to exercise significant influence over the investment company
and applies the equity method of accounting to its investment in the entity (referred to as an equity method investor). In addition, SOP 07-1 includes certain disclosure requirements for parent companies and equity method investors in investment
companies that retain investment company accounting in the parent companys consolidated financial statements or the financial statements of an equity method investor. The provisions of SOP 07-1 were to be effective for fiscal years beginning
on or after December 15, 2007. On February 14, 2008, the FASB issued FSP SOP 07-1-1, which delays indefinitely the effective date of SOP 07-1. The Company will monitor the FASB and AICPA deliberations regarding this standard.



In April 2007, the FASB issued FSP FIN 39-1, An
Amendment of FASB Interpretation No. 39(FSP FIN 39-1). FSP FIN 39-1 addresses whether a reporting entity that is party to a master netting arrangement can offset fair value amounts recognized for the right to reclaim cash collateral (a
receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments that have been offset under the same master netting arrangement in accordance with paragraph 10 of Interpretation
39. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007, with early application permitted. FSP FIN 39-1 is not expected to have a material impact on the Companys financial position or results of operations upon
adoption.



In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is expected to expand the use of fair value measurement, which is consistent with the FASBs long-term measurement objectives for
accounting for financial instruments. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities.
SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. In addition, SFAS 159 does not establish requirements for recognizing and measuring dividend income, interest
income or interest expense, nor does it eliminate disclosure



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS No. 157,
Fair Value Measurements (SFAS 157), and SFAS No. 107, Disclosures about Fair Value of Financial Instruments. SFAS 159 is effective as of the beginning of an entitys first fiscal year beginning after November 15, 2007.
The Company will elect adoption of SFAS 159 for certain financial instruments effective January 1, 2008, which is not expected to have a material impact on the Companys financial position or results of operations. The Company will assess
election for new financial assets or liabilities on a prospective basis.



In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R)
(SFAS 158). SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability on its balance sheet and to recognize changes in that
funded status in the year in which the changes occur through comprehensive income. SFAS 158 also requires an employer to measure the funded status of a plan as of the date of its year-end balance sheet, with limited exceptions. An employer with
publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The
requirement to measure plan assets and benefit obligations as of the date of the employers fiscal year-end balance sheet is effective for fiscal years ending after December 15, 2008. The Company adopted SFAS 158 effective
December 31, 2006. The adoption of SFAS 158 did not have a material impact on the Companys financial position or results of operations.



In September 2006, the FASB issued SFAS 157. SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities
and requires new disclosures about fair value measurements. SFAS 157 also provides guidance regarding the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair
value measurements on earnings. For assets and liabilities that are measured at fair value on a recurring basis in periods subsequent to initial recognition, the reporting entity shall disclose information that enables financial statement users to
assess the inputs used to develop those measurements. For recurring fair value measurements using significant unobservable inputs, the reporting entity shall disclose the effect of the measurements on earnings for the period. SFAS 157 applies
whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years, with early adoption permitted. The Company will adopt SFAS 157 effective January 1, 2008. SFAS 157 is not expected to have a material impact on the Companys financial position or results of
operations upon adoption.



In September 2006,
the United States Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108 (SAB 108). SAB 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements
in current-year financial statements. SAB 108 requires registrants to quantify misstatements using both the balance sheet and income-statement approaches and to evaluate whether either approach results in quantifying an error that is material in
light of relevant quantitative and qualitative factors. SAB 108 does not change the SECs previous guidance in SAB No. 99 on evaluating the materiality of misstatements. The Company adopted SAB 108 effective December 31, 2006. SAB 108
did not have a material impact on the Companys financial position or results of operations upon adoption.



In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of
FASB Statement No. 109, Accounting for Income Taxes(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



FASB Statement No. 109, Accounting for Income Taxes.FIN 48 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 effective January 1, 2007. FIN 48 did not have a material impact on the Companys financial position or results of operations upon
adoption.



In March 2006, the FASB issued SFAS
No. 156, Accounting for Servicing of Financial Assets(SFAS 156).SFAS 156 amends SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 140). SFAS 156
requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. SFAS 156 permits, but does not require, the subsequent measurement of separately recognized servicing assets and
servicing liabilities at fair value. An entity that uses derivative instruments to mitigate the risks inherent in servicing assets and servicing liabilities is required to account for those derivative instruments at fair value. Under SFAS 156, an
entity can elect subsequent fair value measurement to account for its separately recognized servicing assets and servicing liabilities. By electing that option, an entity may simplify its accounting because SFAS 156 permits income statement
recognition of the potential offsetting changes in fair value of those servicing assets and servicing liabilities and derivative instruments in the same accounting period. SFAS 156 is effective for fiscal years beginning after September 15,
2006. The Company adopted SFAS 156 effective January 1, 2007. SFAS 156 did not have a material impact on the Companys financial position or results of operations upon adoption.



In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments (SFAS 155). SFAS 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), and SFAS 140. SFAS 155 also resolves issues addressed in SFAS 133 Implementation Issue No. D1,
Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. In summary, SFAS 155: (1) permits an entity to make an irrevocable election to measure any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation at fair value in its entirety, with changes in fair value recognized in earnings; (2) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS
133; (3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation;
(4) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and (5) amends SFAS 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after
September 15, 2006. Provisions of SFAS 155 may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. The Company adopted SFAS 155 effective January 1, 2006. On the date of adoption,
there was no impact to the Companys financial position or results of operations.



In September 2005, AcSEC issued SOP 05-1. SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment
contracts other than those specifically described in SFAS No. 97,Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, issued by the FASB.
SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights or coverages that occurs as a result of the exchange of a contract for a new contract, or by amendment, endorsement or rider to a contract, or by the
election of a new feature or coverage within a contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. Retrospective application of



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



SOP 05-1 to previously issued financial statements is not permitted. Initial application of SOP 05-1 is required as of the beginning of an entitys
fiscal year. The Company adopted SOP 05-1 effective January 1, 2007, which resulted in a $6.0 million charge, net of taxes, as the cumulative effect of adoption of this accounting principle.



In May 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections(SFAS 154), which replaces Accounting Principles Board Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 applies to
all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15, 2005, with earlier adoption permitted. The Company adopted SFAS 154 effective January 1, 2006. SFAS 154 did not have any impact on the Companys financial
position or results of operations upon adoption.



In December 2004, the FASB issued SFAS 123R, which replaces SFAS No. 123 and supersedes APB 25. SFAS 123R requires companies to expense at fair value all costs resulting from share-based payment transactions, except for equity
instruments held by employee share ownership plans. SFAS 123R also amended SFAS No. 95, Statement of Cash Flows, to require excess tax benefits to be reported as a financing cash inflow rather than as a reduction of taxes paid. In March
2005, the SEC issued SAB No. 107, which summarizes the views of the SEC regarding the interaction between SFAS 123R and certain SEC rules and regulations and provides the SECs views on the valuation of share-based payments for public
companies. The Company considered this guidance in its adoption of SFAS 123R. SFAS 123R as issued by the FASB was to be effective for the Company as of the beginning of the first reporting period that began after June 15, 2005. However, in
April 2005, the SEC adopted a rule that amended the effective date of SFAS 123R. The SECs new rule allowed companies to implement SFAS 123R at the beginning of their next fiscal year, instead of the next reporting period, beginning after
June 15, 2005. The Company adopted SFAS 123R effective January 1, 2006 using the modified prospective method. The cumulative effect of adoption of SFAS 123R did not have a material impact on the Companys financial position or results
of operations. See Note 2(r) for information on the Companys share-based payments.



In October 2006, the FASB issued FSP FAS 123R-6, Technical Corrections of FASB Statement No. 123R(FSP FAS 123R-6). This FSP addresses certain technical corrections of SFAS 123R. The
Company applied the provisions in this FSP effective January 1, 2007. FSP FAS 123R-6 did not have a material impact on the Companys financial position or results of operations upon adoption.



In October 2006, the FASB issued FSP FAS 123R-5, An
Amendment of FSP FAS 123R-1(FSP FAS 123R-5). This FSP addresses whether a modification of an instrument in connection with an equity restructuring should be considered a modification for purposes of applying FSP FAS 123R-1, Classification
and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123R. The Company applied the provisions in this FSP effective January 1, 2007. FSP FAS 123R-5 did not
have a material impact on the Companys financial position or results of operations upon adoption.



In November 2005, the FASB issued FSP FAS 123R-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards (FSP FAS 123R-3). This FSP provides a practical transition election related to accounting for the tax effects of share-based payment awards to employees. An entity can elect to follow the transition guidance for the additional paid-in
capital pool in SFAS 123R or the alternative transition method described in this FSP. An entity that adopts SFAS 123R using either modified retrospective or modified



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



prospective application may make a one-time election to adopt the transition method described in this FSP. The Company elected to use the alternative
transition method effective January 1, 2006. The Companys adoption of FSP FAS 123R-3 did not have a material impact on the Companys financial position or results of operations.



In October 2005, the FASB issued FSP FAS 123R-2. This FSP is
a practical accommodation in determining the grant date of an award subject to SFAS 123R, assuming all other criteria in the grant date definition have been met. According to this FSP, a mutual understanding of the key terms and conditions of an
award to an individual employee will be presumed to exist at the date the award is approved in accordance with the relevant corporate governance requirements (that is, by the Board or management with the relevant authority) if certain conditions are
met. The Company adopted FSP FAS 123R-2 effective January 1, 2006. FSP FAS 123R-2 has not had a material impact on the Companys financial position or results of operations. See Note 2(r) for a discussion of the impact of FSP FAS 123R-2 on
2006 grants.



(4) Fair Value of Financial Instruments



Assets and liabilities that are presented at fair value in
the consolidated balance sheets are not included in the disclosures below, including investment securities, cash, separate accounts, securities lending collateral and derivative financial instruments. Those financial assets and liabilities not
presented at fair value are discussed below.



The fair value of a financial instrument is defined as the amount at which the financial instrument could be bought or sold, or in the case of liabilities incurred or settled, in a current transaction between willing parties. In cases where
quoted market prices are not available, fair value is based on the best information available in the circumstances. Such estimates of fair value consider prices for similar assets or similar liabilities and the results of valuation techniques to the
extent available in the circumstances. Examples of valuation techniques include the present value of estimated expected future cash flows using discount rates commensurate with the risks involved, option-pricing models, matrix pricing,
option-adjusted spread models and fundamental analysis. Valuation techniques for measuring assets and liabilities must be consistent with the objective of measuring fair value and should incorporate assumptions that market participants would use in
their estimates of values, future revenues and future expenses, including assumptions about interest rates, default, prepayment and volatility.



Many of the Companys assets and liabilities subject to these disclosure requirements are not actively traded, requiring fair values
to be estimated by management using matrix pricing, present value or other suitable valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Although
fair value estimates are calculated using assumptions that management believes are appropriate, changes in assumptions could cause these estimates to vary materially. In that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in the immediate settlement of the instruments.



The tax ramifications of the related unrealized gains and losses can have a significant effect on the estimates of fair value and have not
been considered in arriving at such estimates.



In estimating its fair value disclosures, the Company used the following methods and assumptions:



Mortgage loans on real estate, net: The fair values of mortgage loans on real estate are estimated using discounted cash flow
analyses based on interest rates currently being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. Estimated fair value is based on the present
value of expected future cash flows discounted at the loans effective interest rate.



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Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



Policy loans: The carrying amount reported in the consolidated balance sheets
approximates fair value.



Investment
contracts: The fair values of the Companys liabilities under investment type contracts are based on one of two methods. For investment contracts without defined maturities, fair value is the amount payable on demand, net of certain
surrender charges. For investment contracts with known or determined maturities, fair value is estimated using discounted cash flow analysis. Interest rates used in this analysis are similar to currently offered contracts with maturities consistent
with those remaining for the contracts being valued.



Short-term debt: The carrying amount reported in the consolidated balance sheets approximates fair value.



Long-term debt: The fair values for senior notes are based on quoted market prices. The fair values of the junior subordinated
debentures issued to a related party are based on quoted market prices of the capital securities of Nationwide Financial Services Capital Trust I (Trust I), which approximate the fair value of this obligation.



The following table summarizes the carrying values and
estimated fair values of financial instruments subject to disclosure requirements as of December 31:



|                                   |  |               |           |   |                     |   |           |               |  |   |                     |   |  |   |           |  
|---------------------------------- |  | ------------- | --------- | - | ------------------- | - | --------- | ------------- |  | - | ------------------- | - |  | - | --------- | -
|                                   |  | 2007          |           |   | 2006                |  
|(in millions)                      |  | Carryingvalue |           |   | Estimatedfair value |   |           | Carryingvalue |  |   | Estimatedfair value |  
|Assets                             |  |               |           |   |                     |   |           |               |  |   |                     |   |  |   |           |  
|Investments:                       |  |               |           |   |                     |   |           |               |  |   |                     |   |  |   |           |  
|Mortgage loans on real estate, net |  | $             | 8,316.1   |   |                     | $ | 8,335.7   |               |  | $ | 8,909.8             |   |  | $ | 8,821.5   |  
|Policy loans                       |  |               | 1,018.3   |   |                     |   | 1,018.3   |               |  |   | 966.9               |   |  |   | 966.9     |  
|                                   |  |               |           |  
|Liabilities                        |  |               |           |   |                     |   |           |               |  |   |                     |   |  |   |           |  
|Investment contracts               |  |               | (25,546.0 | ) |                     |   | (23,937.6 | )             |  |   | (28,225.1           | ) |  |   | (26,527.0 | )
|Short-term debt                    |  |               | (309.3    | ) |                     |   | (309.3    | )             |  |   | (85.2               | ) |  |   | (85.2     | )
|Long-term debt                     |  |               | (1,565.1  | ) |                     |   | (1,566.8  | )             |  |   | (1,398.5            | ) |  |   | (1,437.5  | )



(5) Derivative Financial
Instruments



Qualitative Disclosure



Interest Rate Risk Management



The Company periodically purchases fixed rate investments to
back variable rate liabilities. As a result, the Company can be exposed to interest rate risk due to the mismatch between variable rate liabilities and fixed rate assets. In an effort to mitigate the risk from this mismatch, the Company enters into
various types of derivative instruments, with fluctuations in the fair values of the derivatives offsetting changes in the fair values of the investments resulting from changes in interest rates. The Company principally uses pay fixed/receive
variable interest rate swaps to manage this risk.



Under these interest rate swaps, the Company receives variable interest rate payments and makes fixed rate payments. The fixed interest paid on the swap offsets the fixed interest received on the investment, resulting in the Company
receiving the variable interest payments on the swap, generally 3-month U.S. London Interbank Offered Rate (LIBOR), and the credit spread on the investment. The net receipt of a variable rate will then more closely match the variable rate paid on
the liability.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



As a result of entering into fixed rate commercial mortgage loan and private
placement commitments, the Company is exposed to changes in the fair value of such commitments due to changes in interest rates during the commitment period prior to funding of the loans. In an effort to manage this risk, the Company enters into
short U.S. Treasury futures and/or pay fixed interest rate swaps during the commitment period. With short U.S. Treasury futures or pay fixed interest rate swaps, if interest rates rise/fall, the gains/losses on the futures will offset the change in
fair value of the commitment attributable to the change in interest rates.



The Company periodically purchases variable rate investments such as commercial mortgage loans and corporate bonds. As a result, the Company can be exposed to variability in cash flows and investment income due to
changes in interest rates. Such variability poses risks to the Company when the assets are funded with fixed rate liabilities. In an effort to manage this risk, the Company may enter into receive fixed/pay variable interest rate swaps.



In using these interest rate swaps, the Company receives
fixed interest rate payments and makes variable rate payments. The variable interest paid on the swap offsets the variable interest received on the investment, resulting in the Company receiving the fixed interest payments on the swap and the credit
spread on the investment. The net receipt of a fixed rate will then more closely match the fixed rate paid on the liability.



The Company manages interest rate risk at the segment level. Different segments may simultaneously hedge interest rate risks associated
with owning fixed and variable rate investments considering the risk relevant to a particular segment.



Foreign Currency Risk Management



In conjunction with the Companys MTN program, the Company periodically issues both fixed and variable rate liabilities denominated
in foreign currencies. As a result, the Company is exposed to changes in the fair value of liabilities due to changes in foreign currency exchange rates and related interest rates. In an effort to manage these risks, the Company enters into
cross-currency interest rate swaps.



The
Company is exposed to changes in the fair value of fixed rate investments denominated in a foreign currency due to changes in foreign currency exchange rates and related interest rates. In an effort to manage this risk, the Company uses
cross-currency interest rate hedges to swap these asset characteristics to variable U.S. dollar rate instruments. Cross-currency interest rate swaps on assets are structured to pay a fixed rate, in a foreign currency, and receive a variable U.S.
dollar rate, generally 3-month U.S. LIBOR. These derivative instruments are designated as a fair value hedge of a fixed rate foreign denominated asset.



Cross-currency interest rate swaps on variable rate investments are structured to pay a variable rate, in a foreign currency, and receive
a fixed U.S. dollar rate. The terms of the foreign currency paid on the swap will exactly match the terms of the foreign currency received on the asset, thus eliminating currency risk. These derivative instruments are designated as a cash flow
hedge.



Equity Market Risk Management



Asset fees calculated as a percentage of separate account
assets are a significant source of revenue to the Company. As of December 31, 2007, approximately 82% of separate account assets were invested in equity mutual funds (approximately 83% as of December 31, 2006). Gains and losses in the
equity markets result in corresponding increases and decreases in the Companys separate account assets and asset fee revenue. In



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Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



addition, a decrease in separate account assets may decrease the Companys expectations of future profit margins due to a decrease in asset fee revenue
and/or an increase in guaranteed contract claims, which also may require the Company to accelerate amortization of DAC.



The Companys long-term assumption for net separate account returns is 7% annual growth. If equity markets were unchanged throughout
a given year, the Company estimates that its net earnings per diluted share, calculated using current weighted average diluted shares outstanding, would be approximately $0.05 to $0.10 less than if the Companys long-term assumption for net
separate account returns were realized. This analysis assumes no other factors change and that an unlocking of DAC assumptions would not be required. However, as it does each quarter, the Company would evaluate its DAC balance and underlying
assumptions to determine the need for unlocking. The Company can provide no assurance that the experience of flat equity market returns would not result in changes to other factors affecting profitability, including the possibility of unlocking of
DAC assumptions.



Many of the Companys
individual variable annuity contracts offer GMDB features. A GMDB generally provides a benefit if the annuitant dies and the contract value is less than a specified amount, which may be based on premiums paid less amounts withdrawn or contract value
on a specified anniversary date. A decline in the stock market causing the contract value to fall below this specified amount, which varies from contract to contract based on the date the contract was entered into as well as the GMDB feature
elected, will increase the net amount at risk, which is the GMDB in excess of the contract value. This could result in additional GMDB claims.



In an effort to mitigate this risk, the Company implemented a GMDB economic hedging program for certain new and existing business. Prior
to implementation of the GMDB hedging program in 2000, the Company managed this risk primarily by entering into reinsurance arrangements. The GMDB economic hedging program is designed to offset changes in the economic value of the designated GMDB
obligation. Currently the program shorts S&P 500 Index futures, which provides an offset to changes in the value of the designated obligation. The futures are not designated as hedges and, therefore, hedge accounting is not applied. The
Companys economic and accounting hedges are not perfectly offset. Therefore, the economic hedging activity is likely to lead to earnings volatility. This volatility was negligible in 2007. As of December 31, 2007 and 2006, the
Companys net amount at risk was $528.0 million and $574.3 million before reinsurance, respectively, and $319.3 million and $196.2 million net of reinsurance, respectively. As of December 31, 2007 and 2006, the Companys reserve for
GMDB claims was $47.6 million and $29.6 million, respectively.



The Company also offers certain variable annuity products with guaranteed minimum accumulation benefit (GMAB), guaranteed lifetime withdrawal benefit (GLWB) and hybrid GMAB/GLWB riders (collectively referred to as
living benefits). A GMAB provides the contractholder with a guaranteed return of premium, adjusted proportionately for withdrawals, after a specified time period (5, 7 or 10 years) selected by the contractholder at the time of issuance of a variable
annuity contract. In some cases, the contractholder also has the option, after a specified time, to drop the rider and continue the variable annuity contract without the GMAB. The design of the GMAB rider limits the risk to the Company in a variety
of ways including asset allocation requirements, which serve to reduce the Companys potential exposure to underlying fund performance risks. Specifically, the terms in the GMAB rider limit policyholder asset allocation by either
(1) requiring partial allocation of assets to a guaranteed term option (a fixed rate investment option) and excluding certain funds that are highly volatile or difficult to hedge or (2) requiring all assets be allocated to one of the
approved asset allocation funds or models defined by the Company.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



Beginning in March 2005, the Company began offering a hybrid GMAB/GLWB through its
Capital Preservation Plus Lifetime Income (CPPLI) contract rider. This living benefit combines a GMAB feature in its first 5-10 years with a lifetime withdrawal benefit election at the end of the GMAB feature. Upon maturity of the GMAB, the
contractholder can elect the lifetime withdrawal benefit, which would continue for the duration of the insureds life; elect a new CPPLI rider; or drop the rider completely and continue the variable annuity contract without any rider. If the
lifetime withdrawal benefit is elected and the insureds contract value is exhausted through such withdrawals and market conditions, the Company will continue to fund future withdrawals at a pre-defined level until the insureds death. In
some cases, the contractholder has the right to drop the GLWB portion of this rider or periodically reset the guaranteed withdrawal basis to a higher level. This benefit requires a minimum allocation to guaranteed term options or adherence to
limitations required by an approved asset allocation strategy as previously described above.



In March 2006, the Company added Lifetime Income (L.inc), a stand-alone GLWB, to complement CPPLI in its product offerings. This rider is very similar to the hybrid benefit discussed above in
that L.inc and CPPLI both have guaranteed withdrawal rates that increase based on the age at which the contractholder begins taking income. The withdrawal rates are applied to a benefit base to determine the guaranteed lifetime income amount
available to a contractholder. The benefit base is equal to the variable annuity premium at contract issuance and may increase as a result of a ratchet feature that is driven by account performance and a roll-up feature that is driven by policy
duration. Generally, the longer the contractholder waits before commencing withdrawals, the greater the guaranteed lifetime income. One key difference between L.inc and CPPLI is that the charge associated with L.inc is assessed against the benefit
base. This is a risk mitigation feature as it alleviates much of the uncertainty around account performance and customer withdrawal patterns, both of which can lead to lower than expected revenue streams if the charge were assessed on account value.
In June 2007, the Company added a feature to L.inc to allow for a lump settlement in lieu of lifetime withdrawals in certain situations.



The Companys living benefit riders represent an embedded derivative in a variable annuity contract that is required to be separated
from, and valued apart from, the host variable annuity contract. The embedded derivatives are carried at fair value. Subsequent changes in the fair value of the embedded derivatives are recognized in earnings as a component of net realized
investment gains and losses. The fair value of the embedded derivatives is calculated based on a combination of capital market and actuarial assumptions. Projections of cash flows inherent in the valuation of the embedded derivative incorporate
numerous assumptions including, but not limited to, expectations of contractholder persistency, contractholder withdrawal patterns, risk neutral market returns, correlations of market returns and market return volatility. As of December 31,
2007 and 2006, the net balance of the embedded derivatives for living benefits was a liability of $91.9 million and an asset of $23.7 million, respectively.



Similar to the Companys economic hedging for GMDBs, the living benefits features are also being economically hedged. The primary
risks being hedged are the exposures associated with declining equity market returns and downward interest rate movements. The Company employs a variety of instruments to mitigate this exposure including S&P 500 Index futures, U.S. Treasury
futures, interest rate swaps and long-dated over-the-counter put options. The positions used in the economic hedging program are not designated as hedges and, therefore, hedge accounting is not applied. The living benefits hedging program is
designed to offset changes in the economic value of the living benefits obligation to contractholders. Changes in the fair value of the embedded derivatives are likely to create volatility in earnings. The hedging activity associated with changes in
the economic value of the living benefits obligations will likely mitigate a portion of this earnings volatility.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



Other Non-Hedging Derivatives



The Company periodically enters into basis swaps (receive one variable rate, pay another variable rate) to
better match the cash flows received from the specific variable-rate investments with the variable rate paid on a group of liabilities. While the pay-side terms of the basis swap will be consistent with the terms of the asset, the Company is not
able to match the receive-side terms of the derivative to a specific liability. Therefore, basis swaps do not receive hedge accounting treatment.



The Company sells credit default protection on selected debt instruments and combines the credit default swap with selected assets the
Company owns to replicate a higher yielding bond. These selected assets may have sufficient duration for the related liability, but do not earn a sufficient credit spread. The combined credit default swap and investments provide cash flows with the
duration and credit spread targeted by the Company. The credit default swaps do not qualify for hedge accounting treatment.



The Company also has purchased credit default protection on selected debt instruments exposed to short-term credit concerns, or because
the combination of the corporate bond and purchased default protection provides sufficient spread and duration targeted by the Company. The purchased credit default protection is not designated for hedge accounting treatment.



Quantitative Disclosure



Fair Value Hedges



During the years ended December 31, 2007, 2006 and 2005, a net loss of $2.4 million, a net gain of $2.9 million and a net gain of
$4.1 million, respectively, were recognized in net realized investment gains and losses. This represents the ineffective portion of the fair value hedging relationships. There were no gains or losses attributable to the portion of the derivative
instruments changes in fair value excluded from the assessment of hedge effectiveness. There were also no gains or losses recognized in earnings as a result of hedged firm commitments no longer qualifying as fair value hedges.



Cash Flow Hedges



For the years ended December 31, 2007, 2006 and 2005,
the ineffective portion of cash flow hedges was a net loss of $1.4 million, a net loss of $1.5 million and a net gain of $3.2 million, respectively. There were no net gains or losses attributable to the portion of the derivative instruments
changes in fair value excluded from the assessment of hedge effectiveness.



In general, the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows associated with forecasted transactions, other than those relating to variable interest on
existing financial instruments, is twelve months or less. However, in 2003 the Company entered into a hedge of a forecasted purchase of shares of a mutual fund tied to the S&P 500 Index where delivery of the shares will occur in 2033.



During 2007, the Company did not discontinue
any cash flow hedges because the original forecasted transaction was no longer probable. Additionally, no amounts were reclassified from AOCI into earnings due to the probability that a forecasted transaction would not occur.



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



Other Derivative Instruments, Including Embedded Derivatives



Net realized investment gains and losses for the years ended
December 31, 2007, 2006 and 2005 included net losses of $12.4 million, $0.5 million and $9.1 million, respectively, related to other derivative instruments, including embedded derivatives, not designated in hedging relationships. In addition,
the Individual Investments segment included net losses of $51.8 million (recorded as a $41.7 million net realized loss, net investment income of $2.6 million and annuity expense of $12.7 million) and $11.4 million (recorded as net investment income
of $10.7 million and annuity expense of $22.1 million) for the years ended December 31, 2007 and 2006, respectively, related to other derivative instruments, including embedded derivatives, not designated in hedging relationships. For the years
ended December 31, 2007, 2006 and 2005, net losses of $0.5 million, $10.6 million and $80.7 million, respectively, were recorded in net realized investment gains and losses reflecting the change in fair value of cross-currency interest rate
swaps hedging variable rate MTNs denominated in foreign currencies. No additional net gains were recorded in net realized investment gains and losses to reflect the change in spot rates of these foreign currency denominated obligations during the
year ended December 31, 2007 compared to $14.1 million and $78.3 million during the years ended December 31, 2006 and 2005, respectively.



The following table summarizes the notional amount of derivative financial instruments outstanding as of December 31:



|                                                          |  |      |         |      |   |        
|--------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|(in millions)                                             |  | 2007 |         | 2006
|Interest rate swaps:                                      |  |      |         |      |   |        
|Pay fixed/receive variable rate swaps hedging investments |  | $    | 1,692.9 |      | $ | 1,930.5
|Pay variable/receive fixed rate swaps hedging investments |  |      | 21.0    |      |   | 60.4   
|Pay fixed/receive variable rate swaps hedging liabilities |  |      | 1,120.7 |      |   | 1,048.8
|Pay variable/receive fixed rate swaps hedging liabilities |  |      | 343.1   |      |   |       
|Cross-currency interest rate swaps:                       |  |      |         |      |   |        
|Hedging foreign currency denominated investments          |  |      | 375.5   |      |   | 452.9  
|Hedging foreign currency denominated liabilities          |  |      | 1,144.1 |      |   | 1,137.1
|Credit default swaps                                      |  |      | 300.3   |      |   | 376.8  
|Other non-hedging instruments                             |  |      | 518.1   |      |   | 101.8  
|Equity option contracts                                   |  |      | 2,361.8 |      |   | 1,640.7
|Interest rate futures contracts                           |  |      | 371.3   |      |   | 214.2  
|                                                          |  |      |         |      |   |        
|Total                                                     |  | $    | 8,248.8 |      | $ | 6,963.2
|                                                          |  |      |         |      |   |        



The
notional value is the amount upon which exchanges of interest are based. Exposure to a counterparty arises if the net expected cash flows are positive, as calculated based on forward interest rate curves and notional contract values.



F-35



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



(6) Investments



The following table summarizes the amortized cost, gross unrealized gains and losses, and estimated fair values of securities
available-for-sale as of the dates indicated:



|                                                                         |  |               |          |                      |   |                       |  |                     |       |  |   |         
|------------------------------------------------------------------------ |  | ------------- | -------- | -------------------- | - | --------------------- |  | ------------------- | ----- |  | - | --------
|(in millions)                                                            |  | Amortizedcost |          | Grossunrealizedgains |   | Grossunrealizedlosses |  | Estimatedfair value
|December 31, 2007:                                                       |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Fixed maturity securities:                                               |  |               |          |                      |   |                       |  |                     |       |  |   |         
|U.S. Treasury securities and obligations of U.S. Government corporations |  | $             | 172.8    |                      | $ | 17.4                  |  | $                   | 0.9   |  | $ | 189.3   
|Agencies not backed by the full faith and credit of the U.S. Government  |  |               | 418.1    |                      |   | 61.5                  |  |                     |      |  |   | 479.6   
|Obligations of states and political subdivisions                         |  |               | 273.3    |                      |   | 1.7                   |  |                     | 2.8   |  |   | 272.2   
|Debt securities issued by foreign governments                            |  |               | 56.2     |                      |   | 2.5                   |  |                     | 0.3   |  |   | 58.4    
|Corporate securities                                                     |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Public                                                                   |  |               | 9,233.2  |                      |   | 175.2                 |  |                     | 178.8 |  |   | 9,229.6 
|Private                                                                  |  |               | 6,010.7  |                      |   | 135.7                 |  |                     | 66.9  |  |   | 6,079.5 
|Mortgage-backed securities                                               |  |               | 7,142.5  |                      |   | 40.3                  |  |                     | 108.2 |  |   | 7,074.6 
|Asset-backed securities                                                  |  |               | 3,957.1  |                      |   | 33.4                  |  |                     | 184.5 |  |   | 3,806.0 
|                                                                         |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Total fixed maturity securities                                          |  |               | 27,263.9 |                      |   | 467.7                 |  |                     | 542.4 |  |   | 27,189.2
|Equity securities                                                        |  |               | 117.5    |                      |   | 8.3                   |  |                     | 1.6   |  |   | 124.2   
|                                                                         |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Total securities available-for-sale                                      |  | $             | 27,381.4 |                      | $ | 476.0                 |  | $                   | 544.0 |  | $ | 27,313.4
|                                                                         |  |               |          |                      |   |                       |  |                     |       |  |   |         
|December 31, 2006:                                                       |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Fixed maturity securities:                                               |  |               |          |                      |   |                       |  |                     |       |  |   |         
|U.S. Treasury securities and obligations of U.S. Government corporations |  | $             | 179.0    |                      | $ | 12.2                  |  | $                   | 2.1   |  | $ | 189.1   
|Agencies not backed by the full faith and credit of the U.S. Government  |  |               | 564.5    |                      |   | 46.2                  |  |                     | 2.3   |  |   | 608.4   
|Obligations of states and political subdivisions                         |  |               | 274.7    |                      |   | 0.7                   |  |                     | 7.4   |  |   | 268.0   
|Debt securities issued by foreign governments                            |  |               | 36.2     |                      |   | 1.7                   |  |                     | 0.2   |  |   | 37.7    
|Corporate securities                                                     |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Public                                                                   |  |               | 9,732.8  |                      |   | 220.0                 |  |                     | 127.4 |  |   | 9,825.4 
|Private                                                                  |  |               | 6,605.1  |                      |   | 131.5                 |  |                     | 83.8  |  |   | 6,652.8 
|Mortgage-backed securities                                               |  |               | 6,946.0  |                      |   | 23.8                  |  |                     | 122.8 |  |   | 6,847.0 
|Asset-backed securities                                                  |  |               | 3,728.9  |                      |   | 45.5                  |  |                     | 42.8  |  |   | 3,731.6 
|                                                                         |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Total fixed maturity securities                                          |  |               | 28,067.2 |                      |   | 481.6                 |  |                     | 388.8 |  |   | 28,160.0
|Equity securities                                                        |  |               | 57.2     |                      |   | 11.0                  |  |                     | 0.6   |  |   | 67.6    
|                                                                         |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Total securities available-for-sale                                      |  | $             | 28,124.4 |                      | $ | 492.6                 |  | $                   | 389.4 |  | $ | 28,227.6
|                                                                         |  |               |          |                      |   |                       |  |                     |       |  |   |         



The
market value of the Companys general account investments may fluctuate significantly in response to changes in interest rates, investment quality ratings and credit spreads. In addition, the Company may be likely to experience realized
investment losses to the extent its liquidity needs require the disposition of general account fixed maturity securities in unfavorable interest rate, liquidity or credit spread environments.



F-36



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



The table below summarizes the amortized cost and estimated fair values of fixed
maturity securities available-for-sale, by maturity, as of December 31, 2007. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment
penalties.



|                                                                                                                                  |  |               |          |   |                     |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ------------------- | - | -------- | -
|(in millions)                                                                                                                     |  | Amortizedcost |          |   | Estimatedfair value |  
|Fixed maturity securities available-for-sale:                                                                                     |  |               |          |   |                     |   |          |  
|Due in one year or less                                                                                                           |  | $             | 1,523.3  |   |                     | $ | 1,525.8  |  
|Due after one year through five years                                                                                             |  |               | 6,891.4  |   |                     |   | 7,002.2  |  
|Due after five years through ten years                                                                                            |  |               | 4,117.4  |   |                     |   | 4,155.2  |  
|Due after ten years                                                                                                               |  |               | 3,632.2  |   |                     |   | 3,625.4  |  
|                                                                                                                                  |  |               |          |   |                     |   |          |  
|Subtotal                                                                                                                          |  |               | 16,164.3 |   |                     |   | 16,308.6 |  
|Mortgage-backed securities                                                                                                        |  |               | 7,142.5  |   |                     |   | 7,074.6  |  
|Asset-backed securities                                                                                                           |  |               | 3,957.1  |   |                     |   | 3,806.0  |  
|                                                                                                                                  |  |               |          |   |                     |   |          |  
|Total                                                                                                                             |  | $             | 27,263.9 |   |                     | $ | 27,189.2 |  
|                                                                                                                                  |  |               |          |   |                     |   |          |  
|The following table
presents the components of net unrealized (losses) gains on securities available-for-sale, as of December 31: | 
|(in millions)                                                                                                                     |  | 2007          |          |   | 2006                |  
|Net unrealized (losses) gains, before adjustments and taxes                                                                       |  | $             | (68.0    | ) |                     | $ | 103.2    |  
|Adjustment to DAC                                                                                                                 |  |               | 87.1     |   |                     |   | 83.3     |  
|Adjustment to VOBA                                                                                                                |  |               | 1.4      |   |                     |   | (6.6     | )
|Adjustment to future policy benefits and claims                                                                                   |  |               | (80.9    | ) |                     |   | (86.8    | )
|Adjustment to policyholder dividend obligation                                                                                    |  |               | (13.8    | ) |                     |   | (16.0    | )
|Deferred federal income tax benefit (expense)                                                                                     |  |               | 26.1     |   |                     |   | (27.1    | )
|                                                                                                                                  |  |               |          |   |                     |   |          |  
|Net unrealized (losses) gains                                                                                                     |  | $             | (48.1    | ) |                     | $ | 50.0     |  
|                                                                                                                                  |  |               |          |   |                     |   |          |  



The
following table presents an analysis of the net decrease in net unrealized gains on securities available-for-sale before adjustments and taxes for the years ended December 31:



|                          |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|(in millions)             |  | 2007 |        |   | 2006 |   |        | 2005 | 
|Fixed maturity securities |  | $    | (167.5 | ) |      | $ | (182.4 | )    |  | $ | (818.4 | )
|Equity securities         |  |      | (3.7   | ) |      |   | (0.4   | )    |  |   | (3.1   | )
|                          |  |      |        |   |      |   |        |      |  |   |        |  
|Net decrease              |  | $    | (171.2 | ) |      | $ | (182.8 | )    |  | $ | (821.5 | )
|                          |  |      |        |   |      |   |        |      |  |   |        |  



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



For securities available-for-sale as of the dates indicated, the following table
summarizes the Companys gross unrealized losses based on the amount of time each type of security has been in an unrealized loss position:



|                                                                         |  |                               |         |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|------------------------------------------------------------------------ |  | ----------------------------- | ------- | --------------------- | ------------------ | ----- | ------------------- | ----- | --------------------- | -------- |  | ------------------- | ----- | --------------------- |  | - | -------- |  | - | -----
|                                                                         |  | Less than or equal toone year |         |                       | More than one year |       |                     | Total
|(in millions)                                                            |  | Estimatedfair value           |         | Grossunrealizedlosses |                    |       | Estimatedfair value |       | Grossunrealizedlosses |          |  | Estimatedfair value |       | Grossunrealizedlosses
|December 31, 2007:                                                       |  |                               |         |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Fixed maturity securities:                                               |  |                               |         |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|U.S. Treasury securities and obligations of U.S. Government corporations |  | $                             | 23.7    |                       | $                  | 0.6   |                     |       | $                     | 4.2      |  | $                   | 0.3   |                       |  | $ | 27.9     |  | $ | 0.9  
|Agencies not backed by the full faith and credit of the U.S. Government  |  |                               |        |                       |                    |      |                     |       |                       | 13.9     |  |                     |      |                       |  |   | 13.9     |  |   |     
|Obligations of states and political subdivisions                         |  |                               | 23.9    |                       |                    | 0.2   |                     |       |                       | 154.3    |  |                     | 2.6   |                       |  |   | 178.2    |  |   | 2.8  
|Debt securities issued by foreign governments                            |  |                               | 26.4    |                       |                    | 0.3   |                     |       |                       | 1.2      |  |                     |      |                       |  |   | 27.6     |  |   | 0.3  
|Corporate securities                                                     |  |                               |         |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Public                                                                   |  |                               | 2,452.6 |                       |                    | 103.4 |                     |       |                       | 2,287.7  |  |                     | 75.4  |                       |  |   | 4,740.3  |  |   | 178.8
|Private                                                                  |  |                               | 740.4   |                       |                    | 18.8  |                     |       |                       | 2,076.6  |  |                     | 48.1  |                       |  |   | 2,817.0  |  |   | 66.9 
|Mortgage-backed securities                                               |  |                               | 1,448.4 |                       |                    | 27.6  |                     |       |                       | 2,775.7  |  |                     | 80.6  |                       |  |   | 4,224.1  |  |   | 108.2
|Asset-backed securities                                                  |  |                               | 1,515.3 |                       |                    | 132.3 |                     |       |                       | 1,211.6  |  |                     | 52.2  |                       |  |   | 2,726.9  |  |   | 184.5
|                                                                         |  |                               |         |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Total fixed maturity securities                                          |  |                               | 6,230.7 |                       |                    | 283.2 |                     |       |                       | 8,525.2  |  |                     | 259.2 |                       |  |   | 14,755.9 |  |   | 542.4
|Equity securities                                                        |  |                               | 37.5    |                       |                    | 1.6   |                     |       |                       | 0.1      |  |                     |      |                       |  |   | 37.6     |  |   | 1.6  
|                                                                         |  |                               |         |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Total                                                                    |  | $                             | 6,268.2 |                       | $                  | 284.8 |                     |       | $                     | 8,525.3  |  | $                   | 259.2 |                       |  | $ | 14,793.5 |  | $ | 544.0
|                                                                         |  |                               |         |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|% of gross unrealized losses                                             |  |                               |         |                       |                    | 52    | %                   |       |                       |          |  |                     | 48    | %                     |  |   |          |  |   |      
|                                                                         |  |                               |         |                       |                    |      
|December 31, 2006:                                                       |  |                               |         |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Fixed maturity securities:                                               |  |                               |         |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|U.S. Treasury securities and obligations of U.S. Government corporations |  | $                             | 66.5    |                       | $                  | 1.0   |                     |       | $                     | 29.9     |  | $                   | 1.1   |                       |  | $ | 96.4     |  | $ | 2.1  
|Agencies not backed by the full faith and credit of the U.S. Government  |  |                               | 31.7    |                       |                    | 0.1   |                     |       |                       | 125.2    |  |                     | 2.2   |                       |  |   | 156.9    |  |   | 2.3  
|Obligations of states and political subdivisions                         |  |                               | 84.5    |                       |                    | 1.0   |                     |       |                       | 161.9    |  |                     | 6.4   |                       |  |   | 246.4    |  |   | 7.4  
|Debt securities issued by foreign governments                            |  |                               | 12.8    |                       |                    | 0.1   |                     |       |                       | 1.3      |  |                     | 0.1   |                       |  |   | 14.1     |  |   | 0.2  
|Corporate securities                                                     |  |                               |         |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Public                                                                   |  |                               | 2,627.7 |                       |                    | 27.8  |                     |       |                       | 3,525.8  |  |                     | 99.6  |                       |  |   | 6,153.5  |  |   | 127.4
|Private                                                                  |  |                               | 1,288.6 |                       |                    | 15.0  |                     |       |                       | 2,165.1  |  |                     | 68.8  |                       |  |   | 3,453.7  |  |   | 83.8 
|Mortgage-backed securities                                               |  |                               | 966.9   |                       |                    | 7.6   |                     |       |                       | 4,194.0  |  |                     | 115.2 |                       |  |   | 5,160.9  |  |   | 122.8
|Asset-backed securities                                                  |  |                               | 580.2   |                       |                    | 4.5   |                     |       |                       | 1,475.0  |  |                     | 38.3  |                       |  |   | 2,055.2  |  |   | 42.8 
|                                                                         |  |                               |         |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Total fixed maturity securities                                          |  |                               | 5,658.9 |                       |                    | 57.1  |                     |       |                       | 11,678.2 |  |                     | 331.7 |                       |  |   | 17,337.1 |  |   | 388.8
|Equity securities                                                        |  |                               | 17.6    |                       |                    | 0.3   |                     |       |                       | 3.4      |  |                     | 0.3   |                       |  |   | 21.0     |  |   | 0.6  
|                                                                         |  |                               |         |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Total                                                                    |  | $                             | 5,676.5 |                       | $                  | 57.4  |                     |       | $                     | 11,681.6 |  | $                   | 332.0 |                       |  | $ | 17,358.1 |  | $ | 389.4
|                                                                         |  |                               |         |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|% of gross unrealized losses                                             |  |                               |         |                       |                    | 15    | %                   |       |                       |          |  |                     | 85    | %                     |  |   |          |  |   |      



F-38



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



The Company has assets that have been in an unrealized loss position for more than
one year that are not other-than-temporarily impaired. The Company reviews each asset in an unrealized loss position and evaluates whether or not the loss is other-than-temporary. This evaluation considers several factors, including the extent of
the unrealized loss, the rating of the affected security, the Companys ability and intent to hold the security until recovery, and economic conditions that could affect the creditworthiness of the issuer. As of December 31, 2007, assets that
have been in an unrealized loss position for more than one year totaled $259.2 million, or 48% of the Companys total unrealized losses. Of this total, $231.8 million, or 89%, were classified as investment grade securities, as defined by the
National Association of Insurance Commissioners (NAIC).



As noted in the table above, the majority of the increases in the Companys unrealized losses from December 31, 2006 to December 31, 2007 were attributable to corporate securities and asset-backed securities (ABSs). These increased
loss positions primarily were driven by the combined impacts of interest rate movements, volatility in investment quality ratings and credit spreads, and illiquid markets.



As of December 31, 2007, 67% of the Companys corporate securities in unrealized loss positions, or $164.1 million,
were classified as investment grade, as defined by the NAIC. Of these investment grade corporate securities, 58%, or $95.9 million, have been in an unrealized loss position for more than one year, but 90% of those investments have ratios of
estimated fair value to amortized cost of at least 90%. Of the Companys corporate securities in unrealized loss positions classified as non-investment grade, 66% have been in an unrealized loss position for less than one year.



As of December 31, 2007, 100% of the Companys ABSs in
unrealized loss positions, or $184.5 million, were classified as investment grade, as defined by the NAIC. Of these investment grade ABSs, 72%, or $132.0 million, have been in an unrealized loss position for less than one year, but 33% of those
investments have ratios of estimated fair value to amortized cost of at least 90%. Of the Companys ABSs in unrealized loss positions that have been in loss positions for more than one year, 58% have ratios of estimated fair value to amortized
cost of at least 90%.



For fixed maturity
securities that are available-for-sale as of December 31, 2007, the following table summarizes the Companys gross unrealized loss position categorized as investment grade vs. non-investment grade, as defined by the NAIC, in an unrealized loss
position for the period of time indicated, and based on the ratio of estimated fair value to amortized cost (in millions):



|                                               |  |                                                      |       |                      |   |       |  |                             |       |                   |   |       |  |                             |      |                   |   |       |  |   |       |  |   |       |  |   |      
|---------------------------------------------- |  | ---------------------------------------------------- | ----- | -------------------- | - | ----- |  | --------------------------- | ----- | ----------------- | - | ----- |  | --------------------------- | ---- | ----------------- | - | ----- |  | - | ----- |  | - | ----- |  | - | -----
|                                               |  | Period of time for which unrealized loss has existed
|                                               |  | Investment Grade                                     |       | Non-Investment Grade |   | Total
|Ratio of estimated fairvalue to amortized cost |  | Lessthan orequal toone year                          |       | More thanone year    |   | Total |  | Lessthan orequal toone year |       | More thanone year |   | Total |  | Lessthan orequal toone year |      | More thanone year |   | Total
|99.9% - 95.0%                                  |  | $                                                    | 68.9  |                      | $ | 116.2 |  | $                           | 185.1 |                   | $ | 15.5  |  | $                           | 7.0  |                   | $ | 22.5  |  | $ | 84.4  |  | $ | 123.2 |  | $ | 207.6
|94.9% - 90.0%                                  |  |                                                      | 50.3  |                      |   | 84.0  |  |                             | 134.3 |                   |   | 11.4  |  |                             | 4.1  |                   |   | 15.5  |  |   | 61.7  |  |   | 88.1  |  |   | 149.8
|89.9% - 85.0%                                  |  |                                                      | 37.6  |                      |   | 18.9  |  |                             | 56.5  |                   |   | 3.8   |  |                             | 7.5  |                   |   | 11.3  |  |   | 41.4  |  |   | 26.4  |  |   | 67.8 
|84.9% - 80.0%                                  |  |                                                      | 12.8  |                      |   | 5.8   |  |                             | 18.6  |                   |   | 3.0   |  |                             | 1.4  |                   |   | 4.4   |  |   | 15.8  |  |   | 7.2   |  |   | 23.0 
|Below 80.0%                                    |  |                                                      | 59.2  |                      |   | 6.9   |  |                             | 66.1  |                   |   | 20.7  |  |                             | 7.4  |                   |   | 28.1  |  |   | 79.9  |  |   | 14.3  |  |   | 94.2 
|                                               |  |                                                      |       |                      |   |       |  |                             |       |                   |   |       |  |                             |      |                   |   |       |  |   |       |  |   |       |  |   |      
|Total                                          |  | $                                                    | 228.8 |                      | $ | 231.8 |  | $                           | 460.6 |                   | $ | 54.4  |  | $                           | 27.4 |                   | $ | 81.8  |  | $ | 283.2 |  | $ | 259.2 |  | $ | 542.4
|                                               |  |                                                      |       |                      |   |       |  |                             |       |                   |   |       |  |                             |      |                   |   |       |  |   |       |  |   |       |  |   |      



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



As noted in the table above, as of December 31, 2007, 65% of the Companys
investments in an unrealized loss position had ratios of estimated fair value to amortized cost of at least 90%. In addition, 84% of the Companys investments in an unrealized loss position were classified as investment grade, as defined by the
NAIC. Of the Companys investments in unrealized loss positions classified as non-investment grade, 67% have been in an unrealized loss position for less than one year.



The NAIC assigns securities quality ratings and uniform valuations (called NAIC Designations), which are
used by insurers when preparing their annual statements. The NAIC assigns designations to publicly traded and privately placed securities. The designations assigned by the NAIC range from class 1 (highest quality) to class 6 (lowest quality). Of the
Companys general account fixed maturity securities, 94% were in the two highest NAIC Designations as of December 31, 2007 and 2006.



The following table summarizes the credit quality, as determined by NAIC Designation, of the Companys general account fixed maturity
securities portfolio as of December 31:



|                  |  |                                       |  |               |          |                     |   |               |  |                     |          |  |   |         
|----------------- |  | ------------------------------------- |  | ------------- | -------- | ------------------- | - | ------------- |  | ------------------- | -------- |  | - | --------
|(in millions)     |  | 2007                                  |  | 2006         
|NAIC designation1 |  | Rating agency equivalent designation2 |  | Amortizedcost |          | Estimatedfair value |   | Amortizedcost |  | Estimatedfair value
|1                 |  | Aaa/Aa/A                              |  | $             | 19,153.4 |                     | $ | 19,056.5      |  | $                   | 19,362.3 |  | $ | 19,351.3
|2                 |  | Baa                                   |  |               | 6,445.9  |                     |   | 6,512.7       |  |                     | 6,928.8  |  |   | 6,997.2 
|3                 |  | Ba                                    |  |               | 1,194.0  |                     |   | 1,166.7       |  |                     | 1,091.5  |  |   | 1,101.6 
|4                 |  | B                                     |  |               | 348.2    |                     |   | 341.6         |  |                     | 647.8    |  |   | 659.8   
|5                 |  | Caa and lower                         |  |               | 83.8     |                     |   | 73.1          |  |                     | 18.5     |  |   | 27.3    
|6                 |  | In or near default                    |  |               | 38.6     |                     |   | 38.6          |  |                     | 18.3     |  |   | 22.8    
|                  |  |                                       |  |               |          |                     |   |               |  |                     |          |  |   |         
|                  |  | Total                                 |  | $             | 27,263.9 |                     | $ | 27,189.2      |  | $                   | 28,067.2 |  | $ | 28,160.0
|                  |  |                                       |  |               |          |                     |   |               |  |                     |          |  |   |         



|1 | NAIC Designations are assigned at least annually. Some designations for securities shown have been assigned to
securities not yet assigned an NAIC Designation in a manner approximating equivalent public rating categories.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | Comparisons between NAIC and Moodys designations are published by the NAIC. If no Moodys rating is
available, the Company assigns internal ratings corresponding to public ratings.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Recent conditions in the securities markets, including changes in interest rates, investment quality ratings, liquidity and credit spreads, have resulted in declines in the values of investment
securities, including mortgage-backed securities (MBSs) and ABSs. When evaluating whether these securities are other-than-temporarily impaired, the Company considers characteristics of the underlying collateral, such as delinquency and default
rates, the quality of the underlying borrower, the type of collateral in the pool, the vintage year of the collateral, subordination levels within the structure of the collateral pool, expected future cash flows, and the Companys ability and
intent to hold the security to recovery. These same factors also affect the estimated fair value of these securities.



The Companys investments in MBSs and ABSs include securities that are supported by Alt-A and Sub-prime collateral. The Company
considers Alt-A collateral to be mortgages whose underwriting standards do not qualify the mortgage for regular conforming or jumbo loan programs. Typical underwriting characteristics that cause a mortgage to fall into the Alt-A classification may
include, but are not limited to, inadequate loan documentation of a borrowers financial information, debt-to-income ratios above normal lending limits, loan-to-value ratios above normal lending limits that do not have primary mortgage
insurance, a borrower who is a temporary resident, and loans securing non-conforming types of real estate. Alt-A mortgages are generally issued



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



to borrowers having higher Fair Isaac Credit Organization (FICO) scores, and the lender typically issues a slightly higher interest rate for such mortgages.
The Company considers Sub-prime collateral to be mortgages that are first-lien mortgage loans issued to Sub-prime borrowers, as demonstrated by recent delinquent rent or housing payments or substandard FICO scores. Second-lien mortgage loans are
also considered Sub-prime. The amortized cost and estimated fair value of the Companys investments in securities containing Alt-A collateral totaled $2,279.3 and $2,230.3, respectively, and the amortized cost and estimated fair value of the
Companys investments in securities containing Sub-prime collateral totaled $864.4 and $809.3, respectively. As of December 31, 2007, 100.0% and 95.2% of securities containing Alt-A and Sub-prime collateral, respectively, were rated AA or
better. In addition, 55.2% and 71.2% of Alt-A and Sub-prime collateral, respectively, was originated in 2005 or earlier.



Proceeds from the sale of securities available-for-sale during 2007, 2006 and 2005 were $5.02 billion, $2.65 billion and $3.48 billion,
respectively. During 2007, gross gains of $77.9 million ($66.6 million and $88.5 million in 2006 and 2005, respectively) and gross losses of $73.8 million ($71.2 million and $24.1 million in 2006 and 2005, respectively) were realized on those sales.



Real estate held for use was $17.8 million and
$38.8 million as of December 31, 2007 and 2006, respectively. These assets are carried at cost less accumulated depreciation, which was $3.6 million and $16.0 million as of December 31, 2007 and 2006, respectively. The carrying value of
real estate held for sale was $4.0 million and $16.0 million as of December 31, 2007 and 2006, respectively.



The carrying value of commercial mortgage loans on real estate considered to be impaired was $7.4 million as of December 31, 2007
($17.5 million as of December 31, 2006), for which the related valuation allowance was $3.0 million ($12.3 million as of December 31, 2006). No valuation allowance exists for collateral dependent commercial mortgage loans for which the
fair value of the collateral is estimated to be greater than the carrying value. During 2007, the average carrying value of impaired mortgage loans on real estate was $3.7 million ($3.5 million in 2006). Interest income on those loans, which is
recognized on a cash basis, was $0.4 million in 2007 ($1.9 million in 2006).



The following table summarizes activity in the valuation allowance account for mortgage loans on real estate for the years ended December 31:



|                                        |  |      |       |   |      |   |      |  |   |      |  
|--------------------------------------- |  | ---- | ----- | - | ---- | - | ---- |  | - | ---- | -
|(in millions)                           |  | 2007 |       |   | 2006 |   | 2005 | 
|Allowance, beginning of period          |  | $    | 36.0  |   |      | $ | 35.1 |  | $ | 36.9 |  
|Net (reductions) additions to allowance |  |      | (11.2 | ) |      |   | 0.9  |  |   | (1.8 | )
|                                        |  |      |       |   |      |   |      |  |   |      |  
|Allowance, end of period                |  | $    | 24.8  |   |      | $ | 36.0 |  | $ | 35.1 |  
|                                        |  |      |       |   |      |   |      |  |   |      |  



F-41



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



The following table summarizes net realized investment (losses) gains from continuing
operations by source for the years ended December 31:



|                                                              |  |      |        |   |      |   |       |      |  |   |       |  
|------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ----- | -
|(in millions)                                                 |  | 2007 |        |   | 2006 |   |       | 2005 | 
|Total realized gains on sales, net of hedging losses          |  |      | 78.9   |   |      |   | 98.7  |      |  |   | 98.5  |  
|Total realized losses on sales, net of hedging gains          |  |      | (85.0  | ) |      |   | (75.6 | )    |  |   | (28.7 | )
|Total other-than-temporary and other investment impairments   |  |      | (116.9 | ) |      |   | (16.8 | )    |  |   | (41.2 | )
|Credit default swaps                                          |  |      | (7.5   | ) |      |   | (1.1  | )    |  |   | (7.5  | )
|Periodic net coupon settlements on non-qualifying derivatives |  |      | 1.7    |   |      |   | 1.9   |      |  |   | 1.0   |  
|Other derivatives                                             |  |      | (29.4  | ) |      |   | (0.6  | )    |  |   | 1.2   |  
|Trading portfolio valuation (loss) gain                       |  |      | (5.7   | ) |      |   |      |      |  |   | 0.4   |  
|                                                              |  |      |        |   |      |   |       |      |  |   |       |  
|Total realized (losses) gains before adjustments              |  |      | (163.9 | ) |      |   | 6.5   |      |  |   | 23.7  |  
|Amounts credited to policyholder dividend obligation          |  |      | (2.5   | ) |      |   | 0.1   |      |  |   | (5.2  | )
|Other                                                         |  |      | 1.2    |   |      |   | 2.5   |      |  |   | 2.3   |  
|                                                              |  |      |        |   |      |   |       |      |  |   |       |  
|Net realized investment (losses) gains                        |  | $    | (165.2 | ) |      | $ | 9.1   |      |  | $ | 20.8  |  
|                                                              |  |      |        |   |      |   |       |      |  |   |       |  



The
following table summarizes net investment income from continuing operations by investment type for the years ended December 31:



|                               |  |      |         |      |   |         |  |   |        
|------------------------------ |  | ---- | ------- | ---- | - | ------- |  | - | -------
|(in millions)                  |  | 2007 |         | 2006 |   | 2005   
|Securities available-for-sale: |  |      |         |      |   |         |  |   |        
|Fixed maturity securities      |  | $    | 1,547.4 |      | $ | 1,582.4 |  | $ | 1,628.8
|Equity securities              |  |      | 5.1     |      |   | 3.5     |  |   | 4.4    
|Trading assets                 |  |      | 3.4     |      |   | 2.1     |  |   | 2.2    
|Mortgage loans on real estate  |  |      | 554.1   |      |   | 577.8   |  |   | 619.5  
|Short-term investments         |  |      | 44.6    |      |   | 56.6    |  |   | 23.5   
|Other                          |  |      | 190.8   |      |   | 150.5   |  |   | 128.9  
|                               |  |      |         |      |   |         |  |   |        
|Gross investment income        |  |      | 2,345.4 |      |   | 2,372.9 |  |   | 2,407.3
|Less investment expenses       |  |      | 68.7    |      |   | 72.7    |  |   | 63.2   
|                               |  |      |         |      |   |         |  |   |        
|Net investment income          |  | $    | 2,276.7 |      | $ | 2,300.2 |  | $ | 2,344.1
|                               |  |      |         |      |   |         |  |   |        



Fixed
maturity securities with an amortized cost of $198.8 million and $21.7 million as of December 31, 2007 and 2006, respectively, were on deposit with various regulatory agencies as required by law.



As of December 31, 2007 and 2006, the Company had
received $604.6 million and $886.7 million, respectively, of cash collateral on securities lending. The Company had not received any non-cash collateral on securities lending as of December 31, 2007 and 2006. As of December 31, 2007 and
2006, the Company had loaned securities with a fair value of $593.0 million and $859.9 million, respectively.



As of December 31, 2007 and 2006, the Company had received $245.4 million and $171.0 million, respectively, of cash for derivative
collateral. The Company also held $18.5 million and $12.8 million of securities as off-balance sheet collateral on derivative transactions as of December 31, 2007 and 2006, respectively. As of December 31, 2007, the Company had pledged
fixed maturity securities with a fair value of $18.8 million as collateral to various derivative counterparties compared to none as of December 31, 2006.



F-42



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



(7) Value of Business Acquired and Other Intangible Assets



The following table presents a reconciliation of VOBA for
the years ended December 31:



|                                                           |  |      |       |   |      |   |       |  
|---------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|(in millions)                                              |  | 2007 |       |   | 2006 |  
|Balance at beginning of period                             |  | $    | 392.7 |   |      | $ | 449.7 |  
|Amortization of VOBA                                       |  |      | (47.0 | ) |      |   | (46.0 | )
|Net realized losses on investments                         |  |      | 1.1   |   |      |   | 2.4   |  
|                                                           |  |      |       |   |      |   |       |  
|Subtotal                                                   |  |      | 346.8 |   |      |   | 406.1 |  
|Change in unrealized gain on available-for-sale securities |  |      | 8.0   |   |      |   | (13.4 | )
|                                                           |  |      |       |   |      |   |       |  
|Balance at end of period                                   |  | $    | 354.8 |   |      | $ | 392.7 |  
|                                                           |  |      |       |   |      |   |       |  



Interest on the unamortized VOBA balance (at interest rates ranging from 4.50% to 7.56%) is included in amortization and was $24.8 million, $27.5 million and $30.3 million during the years ended December 31, 2007, 2006 and 2005,
respectively.



The following table summarizes
intangible assets as of December 31:



|                                   |  |                    |  |                     |       |                         |   |                     |  |                         |       |  |   |      
|---------------------------------- |  | ------------------ |  | ------------------- | ----- | ----------------------- | - | ------------------- |  | ----------------------- | ----- |  | - | -----
|                                   |  |                    |  | 2007                |       | 2006                   
|(in millions)                      |  | Initialusefullife1 |  | Grosscarryingamount |       | Accumulatedamortization |   | Grosscarryingamount |  | Accumulatedamortization
|Amortizing:                        |  |                    |  |                     |       |                         |   |                     |  |                         |       |  |   |      
|VOBA                               |  | 28 years           |  | $                   | 594.9 |                         | $ | 241.5               |  | $                       | 594.9 |  | $ | 195.6
|Distribution forces                |  | 20 years           |  |                     | 30.4  |                         |   | 3.7                 |  |                         | 30.4  |  |   | 2.6  
|Other                              |  | 14 years           |  |                     | 19.7  |                         |   | 10.1                |  |                         | 20.0  |  |   | 8.1  
|                                   |  |                    |  |                     |       |                         |   |                     |  |                         |       |  |   |      
|Total amortizing intangible assets |  |                    |  |                     | 645.0 |                         |   | 255.3               |  |                         | 645.3 |  |   | 206.3
|Non-amortizing:                    |  |                    |  |                     |       |                         |   |                     |  |                         |       |  |   |      
|State insurance licenses           |  | Indefinite         |  |                     | 8.0   |                         |   |                    |  |                         | 8.0   |  |   |     
|                                   |  |                    |  |                     |       |                         |   |                     |  |                         |       |  |   |      
|Total intangible assets            |  |                    |  | $                   | 653.0 |                         | $ | 255.3               |  | $                       | 653.3 |  | $ | 206.3
|                                   |  |                    |  |                     |       |                         |   |                     |  |                         |       |  |   |      



|1 | The initial useful life was based on applicable assumptions. Actual periods are subject to revision based on
variances from assumptions and other relevant factors. The state insurance licenses have indefinite lives and therefore are not amortized.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Companys annual impairment testing did not result in material impairment losses on intangible assets during 2007, 2006 and 2005.



Based on current assumptions, which are
subject to change, the following table summarizes estimated amortization for the next five years ended December 31:



|              |  |      |      |                                   |   |                       |  |   |     
|------------- |  | ---- | ---- | --------------------------------- | - | --------------------- |  | - | ----
|(in millions) |  | VOBA |      | Intangibleassets withfinite lives |   | Totalintangibleassets
|2008          |  | $    | 33.4 |                                   | $ | 1.9                   |  | $ | 35.3
|2009          |  |      | 30.9 |                                   |   | 2.0                   |  |   | 32.9
|2010          |  |      | 28.8 |                                   |   | 2.2                   |  |   | 31.0
|2011          |  |      | 23.1 |                                   |   | 2.3                   |  |   | 25.4
|2012          |  |      | 19.6 |                                   |   | 2.4                   |  |   | 22.0



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



(8) Goodwill



The following table summarizes changes in the carrying value of goodwill by segment for the years indicated:



|                                |  |                 |       |   |                      |   |       |                    |  |       |     |  |   |       |  
|------------------------------- |  | --------------- | ----- | - | -------------------- | - | ----- | ------------------ |  | ----- | --- |  | - | ----- | -
|(in millions)                   |  | RetirementPlans |       |   | IndividualProtection |   |       | Corporateand Other |  | Total |    
|Balance as of December 31, 2005 |  | $               | 82.2  |   |                      | $ | 282.3 |                    |  | $     |    |  | $ | 364.5 |  
|Adjustments                     |  |                 |      |   |                      |   | (5.5  | )                  |  |       |    |  |   | (5.5  | )
|                                |  |                 |       |   |                      |   |       |                    |  |       |     |  |   |       |  
|Balance as of December 31, 2006 |  |                 | 82.2  |   |                      |   | 276.8 |                    |  |       |    |  |   | 359.0 |  
|Adjustments                     |  |                 | (18.7 | ) |                      |   | (49.0 | )                  |  |       | 9.9 |  |   | (57.8 | )
|                                |  |                 |       |   |                      |   |       |                    |  |       |     |  |   |       |  
|Balance as of December 31, 2007 |  | $               | 63.5  |   |                      | $ | 227.8 |                    |  | $     | 9.9 |  | $ | 301.2 |  
|                                |  |                 |       |   |                      |   |       |                    |  |       |     |  |   |       |  



The
2006 adjustment represents a write-down to fair value of the portion of NFS investment in TBG Financial that was contributed to the joint venture between TBG Financial and Mullin Consulting during the first quarter of 2006.



The 2007 adjustment in the Retirement Plans segment relates
to the sale of The 401(k) Company. The 2007 adjustment in the Individual Protection segment relates to the discontinued operations of TBG Financial (see Note 2(n) for more information). The 2007 adjustment in the Corporate and Other segment relates
to the merger of Nationwide Federal Credit Union into Nationwide Bank.



The Companys 2007 annual impairment testing did not result in any impairments on existing goodwill.



F-44



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



(9) Closed Block



The amounts shown in the following tables for assets, liabilities, revenues and expenses of the closed block of NLICA are those that enter
into the determination of amounts that are to be paid to policyholders.



The following table summarizes financial information for the closed block as of December 31:



|                                                                            |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(in millions)                                                               |  | 2007 |         |   | 2006 |  
|Liabilities:                                                                |  |      |         |   |      |   |         |  
|Future policyholder benefits                                                |  | $    | 1,860.4 |   |      | $ | 1,881.0 |  
|Policyholder funds and accumulated dividends                                |  |      | 141.8   |   |      |   | 141.5   |  
|Policyholder dividends payable                                              |  |      | 30.9    |   |      |   | 30.1    |  
|Policyholder dividend obligation                                            |  |      | 60.7    |   |      |   | 64.0    |  
|Other policy obligations and liabilities                                    |  |      | 11.0    |   |      |   | 10.6    |  
|                                                                            |  |      |         |   |      |   |         |  
|Total liabilities                                                           |  |      | 2,104.8 |   |      |   | 2,127.2 |  
|                                                                            |  |      |         |   |      |   |         |  
|Assets:                                                                     |  |      |         |   |      |   |         |  
|Fixed maturity securities available-for-sale, at estimated fair value       |  |      | 1,178.0 |   |      |   | 1,154.5 |  
|Mortgage loans on real estate                                               |  |      | 320.1   |   |      |   | 344.9   |  
|Policy loans                                                                |  |      | 200.5   |   |      |   | 206.8   |  
|Other assets                                                                |  |      | 156.4   |   |      |   | 159.2   |  
|                                                                            |  |      |         |   |      |   |         |  
|Total assets                                                                |  |      | 1,855.0 |   |      |   | 1,865.4 |  
|                                                                            |  |      |         |   |      |   |         |  
|Excess of reported liabilities over assets                                  |  |      | 249.8   |   |      |   | 261.8   |  
|                                                                            |  |      |         |   |      |   |         |  
|Portion of above representing other comprehensive income:                   |  |      |         |   |      |   |         |  
|Decrease in unrealized gain on fixed maturity securities available-for-sale |  |      | (2.2    | ) |      |   | (14.8   | )
|Adjustment to policyholder dividend obligation                              |  |      | 2.2     |   |      |   | 14.8    |  
|                                                                            |  |      |         |   |      |   |         |  
|Total                                                                       |  |      |        |   |      |   |        |  
|                                                                            |  |      |         |   |      |   |         |  
|Maximum future earnings to be recognized from assets and liabilities        |  | $    | 249.8   |   |      | $ | 261.8   |  
|                                                                            |  |      |         |   |      |   |         |  
|Other comprehensive income:                                                 |  |      |         |   |      |   |         |  
|Fixed maturity securities available-for-sale:                               |  |      |         |   |      |   |         |  
|Fair value                                                                  |  | $    | 1,178.0 |   |      | $ | 1,154.5 |  
|Amortized cost                                                              |  |      | 1,164.3 |   |      |   | 1,138.6 |  
|Shadow policyholder dividend obligation                                     |  |      | (13.7   | ) |      |   | (15.9   | )
|                                                                            |  |      |         |   |      |   |         |  
|Net unrealized appreciation                                                 |  | $    |        |   |      | $ |        |  
|                                                                            |  |      |         |   |      |   |         |  



F-45



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



The following table summarizes closed block operations for the years ended
December 31:



|                                                                                      |  |      |       |   |      |   |       |      |  |   |       |  
|------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|(in millions)                                                                         |  | 2007 |       |   | 2006 |   |       | 2005 | 
|Revenues:                                                                             |  |      |       |   |      |   |       |      |  |   |       |  
|Premiums                                                                              |  | $    | 95.7  |   |      | $ | 98.0  |      |  | $ | 104.4 |  
|Net investment income                                                                 |  |      | 102.5 |   |      |   | 105.0 |      |  |   | 110.2 |  
|Realized investment (losses) gains                                                    |  |      | (1.5  | ) |      |   | (4.1  | )    |  |   | 1.2   |  
|Realized (losses) gains credited to policyholder benefit obligation                   |  |      | (2.5  | ) |      |   | 0.1   |      |  |   | (5.2  | )
|                                                                                      |  |      |       |   |      |   |       |      |  |   |       |  
|Total revenues                                                                        |  |      | 194.2 |   |      |   | 199.0 |      |  |   | 210.6 |  
|                                                                                      |  |      |       |   |      |   |       |      |  |   |       |  
|Benefits and expenses:                                                                |  |      |       |   |      |   |       |      |  |   |       |  
|Policy and contract benefits                                                          |  |      | 136.4 |   |      |   | 137.9 |      |  |   | 142.7 |  
|Change in future policyholder benefits and interest credited to policyholder accounts |  |      | (19.3 | ) |      |   | (22.8 | )    |  |   | (28.5 | )
|Policyholder dividends                                                                |  |      | 61.1  |   |      |   | 58.3  |      |  |   | 55.6  |  
|Change in policyholder dividend obligation                                            |  |      | (3.6  | ) |      |   | 5.7   |      |  |   | 17.7  |  
|Other expenses                                                                        |  |      | 1.2   |   |      |   | 1.2   |      |  |   | 1.2   |  
|                                                                                      |  |      |       |   |      |   |       |      |  |   |       |  
|Total benefits and expenses                                                           |  |      | 175.8 |   |      |   | 180.3 |      |  |   | 188.7 |  
|                                                                                      |  |      |       |   |      |   |       |      |  |   |       |  
|Total revenues, net of benefits and expenses, before federal income tax expense       |  |      | 18.4  |   |      |   | 18.7  |      |  |   | 21.9  |  
|Federal income tax expense                                                            |  |      | 6.4   |   |      |   | 6.5   |      |  |   | 7.7   |  
|                                                                                      |  |      |       |   |      |   |       |      |  |   |       |  
|Revenues, net of benefits and expenses and federal income tax expense                 |  | $    | 12.0  |   |      | $ | 12.2  |      |  | $ | 14.2  |  
|                                                                                      |  |      |       |   |      |   |       |      |  |   |       |  
|Maximum future earnings from assets and liabilities:                                  |  |      |       |   |      |   |       |      |  |   |       |  
|Beginning of period                                                                   |  | $    | 261.8 |   |      | $ | 274.0 |      |  | $ | 288.2 |  
|Change during period                                                                  |  |      | (12.0 | ) |      |   | (12.2 | )    |  |   | (14.2 | )
|                                                                                      |  |      |       |   |      |   |       |      |  |   |       |  
|End of period                                                                         |  | $    | 249.8 |   |      | $ | 261.8 |      |  | $ | 274.0 |  
|                                                                                      |  |      |       |   |      |   |       |      |  |   |       |  



Cumulative closed block earnings from inception through December 31, 2007 and 2006 were higher than expected as determined in the actuarial calculation. Therefore, policyholder dividend obligations (excluding the adjustment for
unrealized gains on available-for-sale securities) were $47.0 million and $48.1 million at December 31, 2007 and 2006, respectively. Other adjustments include revisions to the prior year-end balances including primarily policyholder dividends
payable and adjustments to current and deferred taxes.



(10) Variable
Annuity Contracts



The Company issues
traditional variable annuity contracts through its separate accounts, for which investment income and gains and losses on investments accrue directly to, and investment risk is borne by, the contractholder. The Company also issues non-traditional
variable annuity contracts in which the Company provides various forms of guarantees to benefit the related contractholders. The Company provides four primary guarantee types under non-traditional variable annuity contracts: (1) GMDB;
(2) GMAB; (3) guaranteed minimum income benefits (GMIB); (4) GLWB; and (5) a hybrid guarantee with GMAB and GLWB.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



The GMDB provides a specified minimum return upon death. Many of these death benefits
are spousal, whereby a death benefit will be paid upon death of the first spouse. The survivor has the option to terminate the contract or continue it and have the death benefit paid into the contract and a second death benefit paid upon the
survivors death. The Company has offered six primary GMDB types:



| |  |  | Return of premiumprovides the greater of account value or total deposits made to the contract less any partial withdrawals and assessments, which is
referred to as net premiums. There are two variations of this benefit. In general, there is no lock-in age for this benefit. However, for some contracts the GMDB reverts to the account value at a specified age, typically age 75.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Resetprovides the greater of a return of premium death benefit or the most recent five-year anniversary (prior to lock-in age) account value
adjusted for withdrawals. For most contracts, this GMDB locks in at age 86 or 90, and for others the GMDB reverts to the account value at age 75, 85, 86 or 90.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ratchetprovides the greater of a return of premium death benefit or the highest specified anniversary account value (prior to age 86)
adjusted for withdrawals. Currently, there are three versions of ratchet, with the difference based on the definition of anniversary: monthaversaryevaluated monthly; annualevaluated annually; and five-yearevaluated every fifth
year.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Rollupprovides the greater of a return of premium death benefit or premiums adjusted for withdrawals accumulated at generally 5% simple interest up
to the earlier of age 86 or 200% of adjusted premiums. There are two variations of this benefit. For certain contracts, this GMDB locks in at age 86, and for others the GMDB reverts to the account value at age 75.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Comboprovides the greater of annual ratchet death benefit or rollup death benefit. This benefit locks in at either age 81 or 86.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | Earnings enhancementprovides an enhancement to the death benefit that is a specified percentage of the adjusted earnings accumulated on the contract
at the date of death. There are two versions of this benefit: (1) the benefit expires at age 86, and a credit of 4% of account value is deposited into the contract; and (2) the benefit does not have an end age, but has a cap on the payout
and is paid upon the first death in a spousal situation. Both benefits have age limitations. This benefit is paid in addition to any other death benefits paid under the contract.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The GMAB, offered in the Companys Capital Preservation
Plus contract rider, is a living benefit that provides the contractholder with a guaranteed return of premium, adjusted proportionately for withdrawals, after a specified time period (5, 7 or 10 years) selected by the contractholder at the issuance
of the variable annuity contract. In some cases, the contractholder also has the option, after a specified time period, to drop the rider and continue the variable annuity contract without the GMAB. In general, the GMAB requires a minimum allocation
to guaranteed term options or adherence to limitations required by an approved asset allocation strategy.



The GMIB is a living benefit that provides the contractholder with a guaranteed annuitization value. The GMIB types are:



| |  |  | Ratchetprovides an annuitization value equal to the greater of account value, net premiums or the highest one-year anniversary account value (prior
to age 86) adjusted for withdrawals.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Rollupprovides an annuitization value equal to the greater of account value and premiums adjusted for withdrawals accumulated at 5% compound
interest up to the earlier of age 86 or 200% of adjusted premiums.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



| |  |  | Comboprovides an annuitization value equal to the greater of account value, ratchet GMIB benefit or rollup GMIB benefit.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



See Note 5 for a complete
description of the Companys hybrid GMAB/GLWB offered through its CPPLI contract rider. All GMAB contracts with the hybrid GMAB/GLWB rider are included with GMAB contracts in the following tables.



The following table summarizes the account values and net
amount at risk, net of reinsurance, for variable annuity contracts with guarantees invested in both general and separate accounts as of December 31:



|                     |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|-------------------- |  | ------------ | -------- | ------------------ | - | --------------------- |  | ------------ |  | ------------------ | -------- | --------------------- | - | ----- |  | ---
|                     |  | 2007         |          | 2006              
|(in millions)        |  | Accountvalue |          | Net amountat risk1 |   | Wtd. avg.attained age |  | Accountvalue |  | Net amountat risk1 |          | Wtd. avg.attained age
|GMDB:                |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|Return of premium    |  | $            | 9,086.7  |                    | $ | 18.7                  |  | 62           |  | $                  | 9,243.7  |                       | $ | 33.9  |  | 60 
|Reset                |  |              | 18,055.4 |                    |   | 62.1                  |  | 64           |  |                    | 17,752.7 |                       |   | 49.3  |  | 63 
|Ratchet              |  |              | 15,931.7 |                    |   | 133.3                 |  | 66           |  |                    | 13,651.6 |                       |   | 31.7  |  | 65 
|Rollup               |  |              | 492.2    |                    |   | 8.4                   |  | 71           |  |                    | 568.1    |                       |   | 11.3  |  | 70 
|Combo                |  |              | 2,555.5  |                    |   | 47.0                  |  | 68           |  |                    | 2,588.7  |                       |   | 28.9  |  | 68 
|                     |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|Subtotal             |  |              | 46,121.5 |                    |   | 269.5                 |  | 66           |  |                    | 43,804.8 |                       |   | 155.1 |  | 64 
|Earnings enhancement |  |              | 519.2    |                    |   | 49.8                  |  | 62           |  |                    | 477.8    |                       |   | 41.1  |  | 61 
|                     |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|TotalGMDB           |  | $            | 46,640.7 |                    | $ | 319.3                 |  | 65           |  | $                  | 44,282.6 |                       | $ | 196.2 |  | 63 
|                     |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|GMAB2:               |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|5 Year               |  | $            | 2,985.6  |                    | $ | 4.6                   |  | N/A          |  | $                  | 2,131.1  |                       | $ | 0.1   |  | N/A
|7 Year               |  |              | 2,644.1  |                    |   | 6.2                   |  | N/A          |  |                    | 1,865.7  |                       |   | 0.1   |  | N/A
|10 Year              |  |              | 927.3    |                    |   | 1.3                   |  | N/A          |  |                    | 784.0    |                       |   |      |  | N/A
|                     |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|TotalGMAB           |  | $            | 6,557.0  |                    | $ | 12.1                  |  | N/A          |  | $                  | 4,780.8  |                       | $ | 0.2   |  | N/A
|                     |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|GMIB3:               |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|Ratchet              |  | $            | 425.2    |                    | $ |                      |  | N/A          |  | $                  | 450.6    |                       | $ |      |  | N/A
|Rollup               |  |              | 1,119.9  |                    |   |                      |  | N/A          |  |                    | 1,187.1  |                       |   |      |  | N/A
|Combo                |  |              | 0.3      |                    |   |                      |  | N/A          |  |                    | 0.5      |                       |   |      |  | N/A
|                     |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|TotalGMIB           |  | $            | 1,545.4  |                    | $ |                      |  | N/A          |  | $                  | 1,638.2  |                       | $ |      |  | N/A
|                     |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|GLWB:                |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|L.inc                |  | $            | 2,865.8  |                    | $ |                      |  | N/A          |  | $                  | 993.8    |                       | $ |      |  | N/A
|                     |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    



|1 | Net amount at risk is calculated on a seriatum basis and equals the respective guaranteed benefit less the account
value (or zero if the account value exceeds the guaranteed benefit). As it relates to GMIB, net amount at risk is calculated as if all policies were eligible to annuitize immediately, although all GMIB options have a waiting period of at least 7
years from issuance, with the earliest annuitizations beginning in 2007.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | GMAB contracts with the hybrid GMAB/GLWB rider had account values of $4.77 billion and $2.95 billion as of
December 31, 2007 and 2006, respectively.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|3 | The weighted average period remaining until expected annuitization is not meaningful and has not been presented
because there is currently no material GMIB exposure.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



The following table summarizes account balances of variable annuity contracts that
were invested in separate accounts as of December 31:



|                     |  |      |          |      |   |         
|-------------------- |  | ---- | -------- | ---- | - | --------
|(in millions)        |  | 2007 |          | 2006
|Mutual funds:        |  |      |          |      |   |         
|Bond                 |  | $    | 5,170.9  |      | $ | 4,499.2 
|Domestic equity      |  |      | 31,450.4 |      |   | 30,084.2
|International equity |  |      | 4,009.4  |      |   | 3,446.8 
|                     |  |      |          |      |   |         
|Total mutual funds   |  |      | 40,630.7 |      |   | 38,030.2
|Money market funds   |  |      | 1,742.1  |      |   | 1,429.1 
|                     |  |      |          |      |   |         
|Total                |  | $    | 42,372.8 |      | $ | 39,459.3
|                     |  |      |          |      |   |         



The
Companys GMDB claim reserves are determined by estimating the expected value of death benefits on contracts that trigger a policy benefit and recognizing the excess ratably over the accumulation period based on total expected assessments. GMIB
claim reserves are determined each period by estimating the expected value of annuitization benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on
total assessments. The Company regularly evaluates its GMDB and GMIB claim reserve estimates and adjusts the additional liability balances as appropriate, with a related charge or credit to other benefits and claims in the period of evaluation if
actual experience or other evidence suggests that earlier assumptions should be revised. The assumptions used in calculating GMIB claim reserves are consistent with those used for calculating GMDB claim reserves. In addition, the calculation of GMIB
claim reserves assumes benefit utilization ranges from a low of 3% when the contractholders annuitization value is at least 10% in the money to 100% utilization when the contractholder is 90% or more in the money.



The Companys living benefit riders represent an
embedded derivative in a variable annuity contract that is required to be separated from, and valued apart from, the host variable annuity contract. The embedded derivatives are carried at fair value. Subsequent changes in the fair value of the
embedded derivatives are recognized in earnings as a component of net realized investment gains and losses. The fair value of the embedded derivatives is calculated based on a combination of capital market and actuarial assumptions.



The following assumptions and methodology were used to
determine the GMDB claim reserves as of December 31, 2007 and 2006:



| |  |  | Data used was based on a combination of historical numbers and future projections generally involving 50 probabilistically generated economic scenarios
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Mean gross equity performance8.1%
| | - |  | ----------------------------------



| |  |  | Equity volatility18.7%
| | - |  | -----------------------



| |  |  | Mortality100% of Annuity 2000 table
| | - |  | ------------------------------------



| |  |  | Asset feesequivalent to mutual fund and product loads
| | - |  | ------------------------------------------------------



| |  |  | Discount rate7.0% and 8.0% as of December 31, 2007 and 2006, respectively
| | - |  | --------------------------------------------------------------------------



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



Lapse rate assumptions vary by duration as shown below:



|                 |  |      |   |  |      |   |  |      |   |  |      |   |  |       |   |  |       |   |  |       |   |  |       |   |  |       |   |  |       |  
|---------------- |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | -
|Duration (years) |  | 1    |   |  | 2    |   |  | 3    |   |  | 4    |   |  | 5     |   |  | 6     |   |  | 7     |   |  | 8     |   |  | 9     |   |  | 10+   |  
|Minimum          |  | 4.00 | % |  | 5.00 | % |  | 6.00 | % |  | 7.00 | % |  | 8.00  | % |  | 9.50  | % |  | 10.00 | % |  | 11.00 | % |  | 14.00 | % |  | 14.00 | %
|Maximum          |  | 4.00 | % |  | 5.00 | % |  | 6.00 | % |  | 7.00 | % |  | 35.00 | % |  | 35.00 | % |  | 23.00 | % |  | 35.00 | % |  | 35.00 | % |  | 23.00 | %



(11) Short-Term Debt



The following table summarizes short-term
debt as of December 31:



|                                                   |  |      |       |      |   |     
|-------------------------------------------------- |  | ---- | ----- | ---- | - | ----
|(in millions)                                      |  | 2007 |       | 2006
|$800.0 million commercial paper program            |  | $    | 199.7 |      | $ |    
|$350.0 million securities lending program facility |  |      | 85.6  |      |   | 75.2
|$50.0 million line of credit                       |  |      | 14.0  |      |   |    
|$10.0 million line of credit                       |  |      | 10.0  |      |   | 10.0
|                                                   |  |      |       |      |   |     
|Total short-term debt                              |  | $    | 309.3 |      | $ | 85.2
|                                                   |  |      |       |      |   |     



The
Company has available as a source of funds a $1.00 billion revolving variable rate credit facility entered into by NFS, NLIC and NMIC with a group of national financial institutions. The facility provides for several and not joint liability with
respect to any amount drawn by any party. The facility provides covenants, including, but not limited to, requirements that the Companys debt not exceed 40% of tangible net worth, as defined, and that NLIC maintain statutory surplus, as
defined, in excess of $1.67 billion. As of December 31, 2007, the Company and NLIC were in compliance with all covenants. The Company had no amounts outstanding under this agreement as of December 31, 2007 and 2006. NLIC also has an $800.0
million commercial paper program and is required to maintain an available credit facility equal to 50% of any amounts outstanding under the commercial paper program. Therefore, borrowing capacity under the aggregate $1.00 billion revolving credit
facility is reduced by 50% of any amounts outstanding under the commercial paper program. NLIC had $199.7 million of commercial paper outstanding at December 31, 2007 at a weighted average interest rate of 4.39% and no commercial paper
outstanding at December 31, 2006.



NLIC
has entered into an agreement with its custodial bank to borrow against the cash collateral that is posted in connection with its securities lending program. This is an uncommitted facility contingent on the liquidity of the securities lending
program. The borrowing facility was established to fund commercial mortgage loans that were originated with the intent of sale through securitization. The maximum amount available under the agreement is $350.0 million. The borrowing rate on this
program is equal to one-month U.S. LIBOR (4.60% and 5.32% as of December 31, 2007 and 2006, respectively). NLIC had $85.6 million and $75.2 million outstanding under this agreement as of December 31, 2007 and 2006, respectively. As of
December 31, 2007, the Company had not provided any guarantees on such borrowings, either directly or indirectly.



The Company also has a wholly-owned subsidiary that has available a variable rate line of credit agreement with a single financial
institution for advances of up to 90 days in amounts up to $50.0 million. The line of credit is collateralized by investments owned by the subsidiary and is included in the consolidated balance sheets. The subsidiary had $14.0 million outstanding on
that line of credit as of December 31, 2007 at a weighted average interest rate of 4.37%.



In addition, the Company has a majority-owned subsidiary that has available an annually renewable, 364-day, $10.0 million variable rate line of credit agreement with a single financial
institution. The line of credit is guaranteed by NFS and is included in the consolidated balance sheets. The subsidiary had $10.0 million



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



outstanding on that line of credit as of December 31, 2007 and 2006 at a weighted average interest rate of 5.54% in 2007 and 5.29% in 2006.



The Company paid interest on short-term debt totaling
$15.5 million, $12.3 million and $11.8 million in 2007, 2006 and 2005, respectively.



(12) Long-Term Debt



The
following table summarizes long-term debt as of December 31:



|                                                                                                             |  |      |         |      |   |        
|------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|(in millions)                                                                                                |  | 2007 |         | 2006
|$300.0 million principal, 8.00% senior notes, due March 1, 2027                                              |  | $    |        |      | $ | 298.6  
|$300.0 million principal, 6.25% senior notes, due November 15, 2011                                          |  |      | 299.2   |      |   | 299.2  
|$300.0 million principal, 5.90% senior notes, due July 1, 2012                                               |  |      | 299.2   |      |   | 299.0  
|$200.0 million principal, 5.625% senior notes, due February 13, 2015                                         |  |      | 199.3   |      |   | 199.2  
|$200.0 million principal, 5.10% senior notes, due October 1, 2015                                            |  |      | 199.5   |      |   | 199.4  
|$400.0 million principal, 6.75% fixed-to-floating rate junior subordinated notes, due May 15, 2037           |  |      | 399.4   |      |   |       
|$100.0 million principal, 7.899% junior subordinated debentures issued to a related party, due March 1, 2037 |  |      | 103.1   |      |   | 103.1  
|Other                                                                                                        |  |      | 65.4    |      |   |       
|                                                                                                             |  |      |         |      |   |        
|Total long-term debt                                                                                         |  | $    | 1,565.1 |      | $ | 1,398.5
|                                                                                                             |  |      |         |      |   |        



On
May 18, 2007, NFS issued $400.0 million principal of 6.75% fixed-to-floating rate junior subordinated notes. These notes bear interest at a fixed rate of 6.75% for a 30-year period, after which the notes will bear interest at the rate of
three-month U.S. LIBOR plus 2.33%. These notes are redeemable under one of three scenarios. First, these notes are redeemable, in whole or in part, at any time on or after May 15, 2037 at their principal amount plus accrued and unpaid interest
to the date of redemption, provided that in the event of a redemption in part, the principal amount outstanding after such redemption is at least $50.0 million. Next, these notes are redeemable, in whole or in part, prior to May 15, 2037, in
cases not involving tax or rating agency events, at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the make-whole price, provided that in the event of redemption in part the principal
amount outstanding after such redemption is at least $50.0 million. Make-whole price means the sum of the present values of the outstanding principal (discounted from May 15, 2037) and remaining scheduled payments of interest that
would have been payable to and including May 15, 2037 (discounted from their respective interest payment dates) on the notes to be redeemed (not including any portion of such payments of interest accrued to the redemption date) to the
redemption date on a semiannual basis at a prevailing U.S. Treasury rate plus 30 basis points, plus accrued and unpaid interest on the principal amount being redeemed to the redemption date. Lastly, these notes are redeemable in whole, but not in
part, prior to May 15, 2037, within 90 days after the occurrence of certain tax or rating agency events, at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the special event make-whole
price. Special event make-whole price means the sum of the present values of the outstanding principal (discounted from May 15, 2037) and remaining scheduled payments of interest that would have been payable to and including
May 15, 2037 (discounted from their respective interest payment dates) on the notes to be redeemed (not including any portion of such payments of interest accrued to the redemption date) to the redemption date on a semiannual basis at a
prevailing U.S. Treasury rate plus 50 basis points, plus accrued and unpaid interest on the principal amount being redeemed to the redemption date.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



On June 4, 2007, NFS redeemed all of its outstanding 8.00% senior notes due
March 1, 2027 at a price of $317.4 million. This amount represents aggregate principal of $300.0 million, an $11.2 million premium due as a result of early redemption (3.728% of the principal amount) and $6.2 million of accrued interest through
the redemption date. These senior notes were originally issued in March 1997 and, in accordance with their terms, became subject to optional redemption by NFS on or after March 1, 2007. As a result of this transaction, NFS incurred a $10.2
million charge ($6.6 million, net of taxes) during the quarter ended June 30, 2007. This charge includes the redemption premium described above and the accelerated amortization of both unamortized debt issuance costs and the unamortized
discount on the original issuance, partially offset by a deferred gain on previous hedging transactions. These amounts (excluding the redemption premium) otherwise would have been recognized through 2027.



The $300.0 million principal of 6.25% senior notes due
November 15, 2011 were issued in November 2001 and are not redeemable prior to their maturity date. The $300.0 million principal of 5.90% senior notes due July 1, 2012, issued in June 2002, and the $200.0 million principal of 5.625% senior
notes due February 13, 2015, issued in February 2003, are redeemable, in whole or in part, at the option of NFS at any time or from time to time at a redemption price equal to the greater of (1) 100% of the aggregate principal amount of
the notes to be redeemed or (2) the sum of the present value of the remaining scheduled payments of principal and interest on the notes, discounted to the redemption date on a semi-annual basis at a prevailing U.S. Treasury rate plus 20 basis
points, together in each case with accrued interest payments to the redemption date. The $200.0 million principal of 5.10% senior notes due October 1, 2015 were issued in September 2005 and are redeemable, in whole or in part, at the option of
NFS at any time or from time to time at a redemption price equal to the greater of (1) 100% of the aggregate principal amount of the notes to be redeemed or (2) the sum of the present value of the remaining scheduled payments of principal
and interest on the notes, discounted to the redemption date on a semi-annual basis at a prevailing U.S. Treasury rate plus 15 basis points, together in each case with accrued interest payments to the redemption date.



The terms of each series of senior notes contain various
restrictive business and financial covenants, including limitations on the disposition of subsidiaries. As of December 31, 2007 and 2006, the Company was in compliance with all such covenants.



On March 11, 1997, Trust I sold, in a public offering,
$100.0 million principal of 7.899% capital securities, representing preferred undivided beneficial interests in the assets of Trust I. This sale generated net proceeds of $98.3 million. Concurrent with the sale of the capital securities, NFS sold to
Trust I $103.1 million principal of its 7.899% junior subordinated debentures due March 1, 2037. The junior subordinated debentures are the sole assets of Trust I and are redeemable by NFS in whole at any time or in part from time to time at
par plus an applicable make-whole premium. The related capital securities will mature or be called simultaneously with the junior subordinated debentures and have a liquidation value of $1,000 per capital security. The capital securities are fully
and unconditionally guaranteed by NFS, and there are no related sinking fund requirements. Distributions on the capital securities are cumulative and payable semi-annually in arrears.



The Company made interest payments on the senior notes of $76.1 million in 2007, $82.0 million in 2006 and
$71.7 million in 2005.



Distributions related
to junior subordinated debentures were classified as interest expense in the consolidated statements of income. The Company made distributions of $21.3 million, $8.1 million and $19.0 million related to junior subordinated debentures in 2007, 2006
and 2005, respectively.



In addition, the
Company has a wholly-owned subsidiary with fixed rate borrowings from various financial institutions totaling $65.0 million as of December 31, 2007 with interest rates ranging from 3.27% to 4.45%.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



These borrowings have maturity dates ranging from two to ten years, and all are secured by investments pledged by the subsidiary. The subsidiary made
interest payments of $0.1 million in 2007.



(13) Federal Income Taxes



NFS acquisition of NFN in 2002 reduced
Nationwide Corp.s economic ownership in the Company from 79.8% to 63.0%. Therefore, NFS and its subsidiaries no longer qualify to be included in the NMIC consolidated federal income tax return. The members of the NMIC consolidated federal
income tax return group participated in a tax sharing arrangement, which uses a consolidated approach in allocating the amount of current and deferred expense to the separate financials statements of subsidiaries.



Under IRC regulations, NFS and its subsidiaries cannot file a
life/non-life consolidated federal income tax return until five full years following NFS departure from the NMIC consolidated federal income tax return group. Therefore, NFS and its direct non-life insurance company subsidiaries will file a
consolidated federal income tax return; NLIC and Nationwide Life and Annuity Insurance Company (NLAIC) will file a consolidated federal income tax return; the direct non-life insurance companies under NLIC will file separate federal income tax
returns; NLICA and its direct life insurance company subsidiaries will file a consolidated federal income tax return; and the direct non-life insurance companies under NLICA will file a consolidated federal income tax return, until 2008, when NFS
will become eligible to file a single life/non-life consolidated federal income tax return with all of its eligible subsidiaries.



The following table summarizes the tax effects of temporary differences that give rise to significant components of the net deferred tax
liability as of December 31:



|                                                |  |      |         |   |      |   |         |  
|----------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(in millions)                                   |  | 2007 |         |   | 2006 |  
|Deferred tax assets:                            |  |      |         |   |      |   |         |  
|Future policy benefits                          |  | $    | 733.9   |   |      | $ | 735.4   |  
|Other                                           |  |      | 312.9   |   |      |   | 186.5   |  
|                                                |  |      |         |   |      |   |         |  
|Gross deferred tax assets                       |  |      | 1,046.8 |   |      |   | 921.9   |  
|Less valuation allowance                        |  |      | (23.7   | ) |      |   | (23.7   | )
|                                                |  |      |         |   |      |   |         |  
|Deferred tax assets, net of valuation allowance |  |      | 1,023.1 |   |      |   | 898.2   |  
|                                                |  |      |         |   |      |   |         |  
|Deferred tax liabilities:                       |  |      |         |   |      |   |         |  
|Deferred policy acquisition costs               |  |      | 1,110.9 |   |      |   | 1,014.6 |  
|Value of business acquired                      |  |      | 124.2   |   |      |   | 137.4   |  
|Other                                           |  |      | 174.8   |   |      |   | 256.8   |  
|                                                |  |      |         |   |      |   |         |  
|Gross deferred tax liabilities                  |  |      | 1,409.9 |   |      |   | 1,408.8 |  
|                                                |  |      |         |   |      |   |         |  
|Net deferred tax liability                      |  | $    | 386.8   |   |      | $ | 510.6   |  
|                                                |  |      |         |   |      |   |         |  



In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the total gross deferred tax assets will not be realized. Future taxable amounts or recovery of federal income taxes
paid within the statutory carryback period can offset nearly all future deductible amounts. Because it is more likely than not that certain deferred tax assets will not be realized, the Company established a valuation allowance of $23.7 million as
of December 31, 2007 and 2006 and $31.7 million as of December 31, 2005.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



The Companys current federal income tax asset was $0.6 million and $20.8
million as of December 31, 2007 and 2006, respectively.



Total federal income taxes paid were $155.0 million, $0.3 million and $236.0 million during the years ended December 31, 2007, 2006 and 2005, respectively.



As of December 31, 2007, the Company had $6.3 million of
net operating loss carryforwards related to non-life losses that are expected to be fully utilized in 2008 when the company will elect to file a life/non-life consolidated federal tax return.



During the second quarter of 2007, the Company recorded $6.4
million of net federal income tax expense adjustments primarily related to differences between the 2006 estimated tax liability and the amounts the Company reported on its 2006 tax returns. The Company recorded an additional $1.5 million and $0.2
million of such adjustments during the third and fourth quarters of 2007, respectively.



Through June 2006, the Companys federal income tax returns for tax years 2000-2002 were under IRS examination pursuant to a routine audit. In accordance with its regular practice,
management established tax reserves based on the current facts and circumstances regarding each tax exposure item for which the ultimate deductibility is open to interpretation. These reserves are reviewed regularly and are adjusted as events occur
that management believes impacts the Companys liability for additional taxes, such as lapsing of applicable statutes of limitations; conclusion of tax audits or substantial agreement on the deductibility/non-deductibility of uncertain items;
additional exposure based on current calculations; identification of new issues; release of administrative guidance; or rendering of a court decision affecting a particular tax issue. A significant component of the Companys tax reserve as of
December 31, 2005 was related to the separate account dividends received deduction (DRD). See Tax Matters in Note 18 for more information regarding DRD.



In July 2006, the Company reached substantial agreement with the IRS on all open issues for tax years 2000-2002, including
issues related to the DRD. Accordingly, the Company revised its estimate of amounts that may be due in connection with certain tax positions, including the DRD, for all open tax years. As a result of the revised estimate, $114.2 million of tax
reserves were released into earnings during the second quarter of 2006.



During the third quarter of 2006, the Company recorded $8.3 million of net federal income tax expense adjustments primarily related to differences between the 2005 estimated tax liability and the amounts reported on
the Companys 2005 tax returns.



During
the third quarter of 2005, the Company refined its separate account DRD estimation process. As a result, the Company identified and recorded additional federal income tax benefits and recoverables of $42.6 million related to all tax years (2000
 2005) that were open at that time. In addition, the Company recorded $5.6 million of net benefit adjustments primarily related to differences between the 2004 estimated tax liability and the amounts reported on the Companys 2004 tax
returns.



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



The following table summarizes the federal income tax expense attributable to income
from continuing operations for the years ended December 31:



|                           |  |      |       |      |   |       |      |  |   |      
|-------------------------- |  | ---- | ----- | ---- | - | ----- | ---- |  | - | -----
|(in millions)              |  | 2007 |       | 2006 |   |       | 2005
|Current                    |  | $    | 155.6 |      | $ | (11.5 | )    |  | $ | 116.8
|Deferred                   |  |      | 35.1  |      |   | 83.7  |      |  |   | 24.6 
|                           |  |      |       |      |   |       |      |  |   |      
|Federal income tax expense |  | $    | 190.7 |      | $ | 72.2  |      |  | $ | 141.4
|                           |  |      |       |      |   |       |      |  |   |      



Total
federal income tax expense differs from the amount computed by applying the U.S. federal income tax rate to income from continuing operations before federal income taxes as follows for the years ended December 31:



|                                |  |        |       |   |      |      |   |        |   |        |   |  |       |        |  |   |        |   |  |       |  
|------------------------------- |  | ------ | ----- | - | ---- | ---- | - | ------ | - | ------ | - |  | ----- | ------ |  | - | ------ | - |  | ----- | -
|                                |  | 2007   |       |   | 2006 |      |   | 2005   |  
|(dollars in millions)           |  | Amount |       |   | %    |      |   | Amount |   |        | % |  |       | Amount |  |   | %      |  
|Computed (expected) tax expense |  | $      | 280.1 |   |      | 35.0 |   |        | $ | 279.8  |   |  | 35.0  |        |  | $ | 273.1  |   |  | 35.0  |  
|DRD                             |  |        | (67.6 | ) |      | (8.5 | ) |        |   | (73.0  | ) |  | (9.1  | )      |  |   | (115.4 | ) |  | (14.8 | )
|Reserve release                 |  |        |      |   |      |     |   |        |   | (114.2 | ) |  | (14.3 | )      |  |   |       |   |  |      |  
|Other, net                      |  |        | (21.8 | ) |      | (2.7 | ) |        |   | (20.4  | ) |  | (2.6  | )      |  |   | (16.3  | ) |  | (2.1  | )
|                                |  |        |       |   |      |      |   |        |   |        |   |  |       |        |  |   |        |   |  |       |  
|Total                           |  | $      | 190.7 |   |      | 23.8 |   |        | $ | 72.2   |   |  | 9.0   |        |  | $ | 141.4  |   |  | 18.1  |  
|                                |  |        |       |   |      |      |   |        |   |        |   |  |       |        |  |   |        |   |  |       |  



(14) Shareholders Equity,
Regulatory Risk-Based Capital and Dividend Restrictions



Overview



The Board of
Directors of the Company has the authority to issue 50.0 million shares of preferred stock without further action of the shareholders. Preferred stock may be issued in one or more classes with full, special, limited or no voting powers;
designations, preferences and relative, participating, optional or other special rights; and qualifications and limitations or restrictions as stated in any resolution adopted by the Board of Directors of the Company issuing any class of preferred
stock. No shares of preferred stock have been issued or are outstanding.



The holders of Class A common stock are entitled to one vote per share. The holders of Class B common stock are entitled to ten votes per share. Class A common stock has no conversion rights. Class B common
stock is convertible into Class A common stock, in whole or in part, at any time and from time to time at the option of the holder, on the basis of one share of Class A common stock for each share of Class B common stock converted. If at
any time after the initial issuance of shares of Class A common stock the number of outstanding shares of Class B common stock falls below 5% of the aggregate number of issued and outstanding shares of common stock, then each outstanding share
of Class B common stock shall automatically convert into one share of Class A common stock. In the event of any sale or transfer of shares of Class B common stock to any person or persons other than NMIC or its affiliates, such shares of Class
B common stock so transferred shall be automatically converted into an equal number of shares of Class A common stock. Cash dividends of $1.04, $0.92 and $0.76 per common share were declared during 2007, 2006 and 2005, respectively.



Share Repurchase Program



On August 3, 2005, the Companys Board of
Directors (the Board) approved a stock repurchase program (the Program). The Program originally authorized the Company to repurchase up to an aggregate of $300.0 million in value of shares of its common stock in the open market, in block trades or
otherwise, and through



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



privately negotiated transactions. On August 2, 2006 and February 21, 2007, the Board extended the Program and authorized additional repurchases of
up to $200.0 million and $450.0 million, respectively, in value of shares of the Companys common stock. On December 5, 2007, the Board further extended the Program through December 2009 and authorized repurchases of up to $500.0 million
in value of shares of the Companys common stock in addition to the $950.0 million total previously authorized. Repurchases under the program are to be made in compliance with all applicable laws and regulations, including SEC rules. All shares
repurchased under the Program are classified as treasury stock in the condensed consolidated balance sheets. The Program may be superseded or discontinued at any time.



During the year ended December 31, 2007, the Company repurchased 9,623,140 shares of its Class A common stock for
an aggregate of $511.4 million at an average price per share of $53.14. Included in the total shares repurchased were 2,965,492 shares repurchased during April 2007 under an accelerated share repurchase agreement (ASR) for $165.0 million at an
average price per share of $55.64 and 2,921,983 shares repurchased during September 2007 under a separate ASR for $152.5 million at an average price per share of $52.19.



The Company entered into each ASR with UBS AG, London Branch (UBS). Under each ASR, the Company immediately repurchased
shares of Class A common stock from UBS. Simultaneously, in April 2007 and September 2007, the Company entered into separate six-month and five-month forward contracts, respectively, with UBS indexed to the number of shares repurchased. Under
the terms of each forward contract, the Company is required to pay or entitled to receive a per share price adjustment based on the difference between the average daily volume weighted prices during the duration of each ASR and the initial reference
price. If obligated to make payment to or receive payment from UBS, the Company can elect settlement in cash or in shares of its Class A common stock. The April 2007 ASR terminated during the third quarter of 2007. During October 2007, the
Company settled its remaining obligation to UBS under the April 2007 ASR by issuing UBS 221,073 shares of its Class A common stock valued at $12.0 million. During November 2007, the Company settled its remaining obligation to UBS under the
September 2007 ASR by issuing UBS 47,783 shares of its Class A common stock valued at $2.2 million.



From the Programs inception through December 31, 2007, the Company repurchased a total of 15,675,368 shares of its Class A
common stock for an aggregate of $779.0 million at an average price per share of $49.70, including the impact of a per share price adjustment during 2006 related to a March 2006 ASR.



In addition to the Class A share repurchases described above, NFS and Nationwide Corp. entered into a
Share Purchase Agreement on November 27, 2006. Pursuant to this agreement, NFS purchased 3,855,050 shares of its Class B common stock held by Nationwide Corp. for $200.0 million at an average price per share of $51.88 (the five-day average
closing price on the New York Stock Exchange for the period beginning November 27, 2006 and ending December 1, 2006). The transaction closed on December 4, 2006. Upon the repurchase, the Class B common stock converted automatically to
Class A common stock. The Company retained these shares in treasury for future issuance.



The Companys management will determine the timing and amount of any additional repurchases based upon its evaluation of market conditions, share price and other factors. The Company
anticipates that it will continue to fund the Program using cash flows from operating activities.



Regulatory Risk-Based Capital



Each insurance companys state of domicile imposes minimum risk-based capital (RBC) requirements that were developed by the NAIC. The
formulas for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



is determined by a ratio of total adjusted capital, as defined by the NAIC, to authorized control level RBC, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within certain levels, each of which requires specified corrective action. Each of the Companys insurance company subsidiaries exceeded the minimum RBC requirements for all periods presented herein.



Dividend Restrictions



As an insurance holding company, NFS ability to meet
debt service obligations and pay operating expenses and dividends depends primarily on the receipt of sufficient funds from its primary operating subsidiary, NLIC. The inability of NLIC to pay dividends to NFS in an amount sufficient to meet debt
service obligations and pay operating expenses and dividends would have a material adverse effect on the Company. The payment of dividends by NLIC is subject to restrictions set forth in the insurance laws and regulations of the State of Ohio, its
domiciliary state. The State of Ohio insurance laws require Ohio-domiciled life insurance companies to seek prior regulatory approval to pay a dividend or distribution of cash or other property if the fair market value thereof, together with that of
other dividends or distributions made in the preceding 12 months, exceeds the greater of (1) 10% of statutory-basis policyholders surplus as of the prior December 31 or (2) the statutory-basis net income of the insurer for the
prior year. During the year ended December 31, 2007, NLIC paid dividends of $537.5 million to NFS, including a $242.5 million extraordinary dividend paid after obtaining approval from the Ohio Department of Insurance (ODI). NLICs
statutory capital and surplus as of December 31, 2007 was $2.50 billion, and statutory net income for 2007 was $309.0 million. As of January 1, 2008, NLIC could not pay dividends to NFS without obtaining prior approval. As of April 2008,
NLIC will be able to pay dividends to NFS totaling $246.5 million upon providing prior notice to the ODI. On February 20, 2008, NLIC declared a dividend of $246.5 million payable to NFS in April 2008. NLIC will provide notice to the ODI before
paying this dividend to NFS.



The State of Ohio
insurance laws also require insurers to seek prior regulatory approval for any dividend paid from other than earned surplus. Earned surplus is defined under the State of Ohio insurance laws as the amount equal to the Companys unassigned funds
as set forth in its most recent statutory financial statements, including net unrealized capital gains and losses or revaluation of assets. Additionally, following any dividend, an insurers policyholder surplus must be reasonable in relation
to the insurers outstanding liabilities and adequate for its financial needs. The payment of dividends by NLIC may also be subject to restrictions set forth in the insurance laws of the State of New York that limit the amount of statutory
profits on NLICs participating policies (measured before dividends to policyholders) available for the benefit of the Company and its shareholders.



The ability of NLICA to pay dividends to NFS is subject to regulation under Pennsylvania insurance law. Under Pennsylvania insurance laws,
unless the PID either approves or does not disapprove payment within 30 days after being notified, NLICA may not pay any cash dividends or other non-stock distributions to NFS during any 12-month period if the total payments exceed the greater of
(1) 10% of statutory-basis policyholders surplus as of the prior December 31 or (2) the statutory-basis net income of the insurer for the prior year. NLICA paid a dividend of $75.0 million to NFS in 2007. The statutory capital
and surplus of NLICA as of December 31, 2007 was $674.0 million, and statutory net income for the year ended December 31, 2007 was $91.6 million. As of January 1, 2008, NLICA could not pay dividends to NFS without obtaining prior
approval.



NFS currently does not expect such
regulator requirements to impair the ability of its insurance company subsidiaries to pay sufficient dividends in order for NFS to have the necessary funds available to meet its obligations.



Comprehensive Income



The Companys comprehensive income includes net income
and certain items that are reported directly within separate components of shareholders equity that are not recorded in net income (other comprehensive income or loss).



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



The following table summarizes the Companys other comprehensive loss, before
and after federal income tax benefit, for the years ended December 31:



|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|(in millions)                                                                                                            |  | 2007 |        |   | 2006 |   |        | 2005 | 
|Net unrealized losses on securities available-for-sale arising during the period:                                        |  |      |        |   |      |   |        |      |  |   |        |  
|Net unrealized losses before adjustments                                                                                 |  | $    | (274.7 | ) |      | $ | (194.3 | )    |  | $ | (789.2 | )
|Net adjustment to DAC                                                                                                    |  |      | 3.8    |   |      |   | 40.5   |      |  |   | 194.7  |  
|Net adjustment to VOBA                                                                                                   |  |      | 8.0    |   |      |   | (13.4  | )    |  |   | 12.0   |  
|Net adjustment to future policy benefits and claims                                                                      |  |      | 5.9    |   |      |   | 23.1   |      |  |   | 18.9   |  
|Net adjustment to policyholder dividend obligation                                                                       |  |      | 2.2    |   |      |   | 14.7   |      |  |   | 34.7   |  
|Related federal income tax benefit                                                                                       |  |      | 89.4   |   |      |   | 45.2   |      |  |   | 185.1  |  
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Net unrealized losses                                                                                                    |  |      | (165.4 | ) |      |   | (84.2  | )    |  |   | (343.8 | )
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Reclassification adjustment for net realized losses (gains) on securities available-for-sale realized during the period: |  |      |        |   |      |   |        |      |  |   |        |  
|Net unrealized losses (gains)                                                                                            |  |      | 103.5  |   |      |   | 11.5   |      |  |   | (32.3  | )
|Related federal income tax (benefit) expense                                                                             |  |      | (36.2  | ) |      |   | (4.0   | )    |  |   | 11.3   |  
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Net reclassification adjustment                                                                                          |  |      | 67.3   |   |      |   | 7.5    |      |  |   | (21.0  | )
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Other comprehensive loss on securities available-for-sale                                                                |  |      | (98.1  | ) |      |   | (76.7  | )    |  |   | (364.8 | )
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Accumulated net holding (losses) gains on cash flow hedges:                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Unrealized holding (losses) gains                                                                                        |  |      | (17.2  | ) |      |   | (0.2   | )    |  |   | 51.2   |  
|Related federal income tax benefit (expense)                                                                             |  |      | 6.0    |   |      |   | 0.1    |      |  |   | (17.9  | )
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Other comprehensive (loss) income on cash flow hedges                                                                    |  |      | (11.2  | ) |      |   | (0.1   | )    |  |   | 33.3   |  
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Other net unrealized losses                                                                                              |  |      | (4.7   | ) |      |   |       |      |  |   |       |  
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Unrecognized amounts on pension plans:                                                                                   |  |      |        |   |      |   |        |      |  |   |        |  
|Net unrecognized amounts                                                                                                 |  |      | 1.0    |   |      |   | 12.3   |      |  |   |       |  
|Related federal income tax expense                                                                                       |  |      | (0.4   | ) |      |   | (4.3   | )    |  |   |       |  
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Other comprehensive income on unrecognized pension amounts                                                               |  |      | 0.6    |   |      |   | 8.0    |      |  |   |       |  
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Total other comprehensive loss                                                                                           |  | $    | (113.4 | ) |      | $ | (68.8  | )    |  | $ | (331.5 | )
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  



Adjustments for net realized gains and losses on the ineffective portion of cash flow hedges were immaterial during the years ended December 31, 2007, 2006 and 2005.



(15) Earnings Per Share



Basic earnings per share represent the amount of earnings for the period available to each share of common stock outstanding during the
reporting period. Diluted earnings per share represent the amount of earnings for the period available to each share of common stock outstanding during the reporting period adjusted for the potential issuance of common shares for stock options, if
dilutive.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



The following table presents information relating to the Companys calculations
of basic and diluted earnings per share (EPS) for the years ended December 31:



|                                                                    |  |        |       |   |          |   |       |            |  |   |        |   |  |          |       |   |            |   |       |        |  |   |          |   |  |            |       |   |  |   |       |   |  |   |       |  
|------------------------------------------------------------------- |  | ------ | ----- | - | -------- | - | ----- | ---------- |  | - | ------ | - |  | -------- | ----- | - | ---------- | - | ----- | ------ |  | - | -------- | - |  | ---------- | ----- | - |  | - | ----- | - |  | - | ----- | -
|                                                                    |  | 2007   |       |   | 2006     |   |       | 2005       | 
|(in millions, except per share amounts)                             |  | Amount |       |   | BasicEPS |   |       | DilutedEPS |  |   | Amount |   |  | BasicEPS |       |   | DilutedEPS |   |       | Amount |  |   | BasicEPS |   |  | DilutedEPS |      
|Income from continuing operations                                   |  | $      | 609.7 |   |          | $ | 4.28  |            |  | $ | 4.25   |   |  | $        | 727.1 |   |            | $ | 4.85  |        |  | $ | 4.82     |   |  | $          | 639.0 |   |  | $ | 4.18  |   |  | $ | 4.16  |  
|Discontinued operations, net of taxes                               |  |        | 23.1  |   |          |   | 0.16  |            |  |   | 0.16   |   |  |          | (3.1  | ) |            |   | (0.02 | )      |  |   | (0.02    | ) |  |            | (28.6 | ) |  |   | (0.19 | ) |  |   | (0.19 | )
|Cumulative effect of adoption of accounting principle, net of taxes |  |        | (6.0  | ) |          |   | (0.04 | )          |  |   | (0.04  | ) |  |          |      |   |            |   |      |        |  |   |         |   |  |            |      |   |  |   |      |   |  |   |      |  
|                                                                    |  |        |       |   |          |   |       |            |  |   |        |   |  |          |       |   |            |   |       |        |  |   |          |   |  |            |       |   |  |   |       |   |  |   |       |  
|Net income                                                          |  | $      | 626.8 |   |          | $ | 4.40  |            |  | $ | 4.37   |   |  | $        | 724.0 |   |            | $ | 4.83  |        |  | $ | 4.80     |   |  | $          | 610.4 |   |  | $ | 3.99  |   |  | $ | 3.97  |  
|                                                                    |  |        |       |   |          |   |       |            |  |   |        |   |  |          |       |   |            |   |       |        |  |   |          |   |  |            |       |   |  |   |       |   |  |   |       |  
|Weighted average common shares outstandingbasic                    |  |        | 142.5 |   |          |   |       |            |  |   |        |   |  |          | 149.9 |   |            |   |       |        |  |   |          |   |  |            | 152.9 |   |  |   |       |   |  |   |       |  
|Dilutive effect of stock options                                    |  |        | 1.0   |   |          |   |       |            |  |   |        |   |  |          | 0.8   |   |            |   |       |        |  |   |          |   |  |            | 0.7   |   |  |   |       |   |  |   |       |  
|                                                                    |  |        |       |   |          |   |       |            |  |   |        |   |  |          |       |   |            |   |       |        |  |   |          |   |  |            |       |   |  |   |       |   |  |   |       |  
|Weighted average common shares outstandingdiluted                  |  |        | 143.5 |   |          |   |       |            |  |   |        |   |  |          | 150.7 |   |            |   |       |        |  |   |          |   |  |            | 153.6 |   |  |   |       |   |  |   |       |  
|                                                                    |  |        |       |   |          |   |       |            |  |   |        |   |  |          |       |   |            |   |       |        |  |   |          |   |  |            |       |   |  |   |       |   |  |   |       |  



(16) Employee Benefit Plans



Defined Benefit Plans



The Company, excluding NFN, and certain affiliated companies
participate in a qualified defined benefit pension plan sponsored by NMIC. This plan covers all employees of participating companies who have completed at least one year of service. Plan contributions are invested in a group annuity contract issued
by NLIC. All participants are eligible for benefits based on an account balance feature. Participants last hired before 2002 are eligible for benefits based on the highest average annual salary of a specified number of consecutive years of the last
ten years of service, if such benefits are of greater value than the account balance feature. The Company funds pension costs accrued for direct employees plus an allocation of pension costs accrued for employees of affiliates whose work benefits
the Company. A separate non-qualified defined benefit pension plan sponsored by NMIC covers certain executives with at least one year of service. The Companys portion of expense relating to the plans sponsored by NMIC was $11.4 million, $22.3
million and $17.9 million for the years ended December 31, 2007, 2006 and 2005, respectively.



NFN also has separate qualified and non-qualified defined benefit pension plans (the NFN pension plans). The NFN pension plans generally cover all NFN employees of participating companies who
have completed at least one year of service. All participants are eligible for benefits based on an account balance feature. Participants hired before 2002 are eligible for benefits based on the highest average annual salary of a specified number of
consecutive years of the last ten years of service, if such benefits are of greater value than the account balance feature. Plan contributions are invested in a group annuity contract issued by NLICA. The Companys portion of income relating to
the NFN pension plans was $2.7 million, $1.7 and $1.4 million for the years ended December 31, 2007, 2006 and 2005, respectively.



See Note 17 for more information on group annuity contracts issued by the Company for various employee benefit plans sponsored by NMIC or
its affiliates.



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Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



The following table summarizes information regarding the funded status of the NFN
pension plans (all are U.S. plans), as of December 31:



|                                                                             |  |      |       |   |      |   |       |  
|---------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|(in millions)                                                                |  | 2007 |       |   | 2006 |  
|Change in benefit obligation:                                                |  |      |       |   |      |   |       |  
|Benefit obligation at beginning of year                                      |  | $    | 101.3 |   |      | $ | 102.9 |  
|Service cost                                                                 |  |      | 2.9   |   |      |   | 2.6   |  
|Interest cost                                                                |  |      | 4.9   |   |      |   | 4.8   |  
|Actuarial loss                                                               |  |      | (1.6  | ) |      |   | 0.1   |  
|Benefits paid                                                                |  |      | (7.5  | ) |      |   | (9.4  | )
|Plan amendment1                                                              |  |      |      |   |      |   | 0.3   |  
|                                                                             |  |      |       |   |      |   |       |  
|Benefit obligation at end of year                                            |  |      | 100.0 |   |      |   | 101.3 |  
|                                                                             |  |      |       |   |      |   |       |  
|Change in plan assets:                                                       |  |      |       |   |      |   |       |  
|Fair value of plan assets at beginning of year                               |  |      | 146.7 |   |      |   | 135.8 |  
|Actual return on plan assets                                                 |  |      | 9.9   |   |      |   | 17.5  |  
|Employer contributions                                                       |  |      | 0.9   |   |      |   | 2.8   |  
|Benefits paid                                                                |  |      | (7.5  | ) |      |   | (9.4  | )
|                                                                             |  |      |       |   |      |   |       |  
|Fair value of plan assets at end of year                                     |  |      | 150.0 |   |      |   | 146.7 |  
|                                                                             |  |      |       |   |      |   |       |  
|Funded status                                                                |  | $    | 50.0  |   |      | $ | 45.4  |  
|                                                                             |  |      |       |   |      |   |       |  
|Amounts not yet reflected in net periodic benefit cost and included in AOCI: |  |      |       |   |      |   |       |  
|Unrecognized prior service cost1                                             |  | $    | (0.3  | ) |      | $ | (0.3  | )
|Unrecognized net gain                                                        |  |      | 13.6  |   |      |   | 12.6  |  
|                                                                             |  |      |       |   |      |   |       |  
|Amount included in AOCI                                                      |  |      | 13.3  |   |      |   | 12.3  |  
|Cumulative employer contributions in excess of net periodic benefit cost     |  |      | 36.7  |   |      |   | 33.1  |  
|                                                                             |  |      |       |   |      |   |       |  
|Net amount recognized on balance sheet                                       |  | $    | 50.0  |   |      | $ | 45.4  |  
|                                                                             |  |      |       |   |      |   |       |  
|Accumulated benefit obligation                                               |  | $    | 92.9  |   |      | $ | 94.1  |  
|                                                                             |  |      |       |   |      |   |       |  



|1 | Represents the increase in the projected benefit obligation related to the application of the Pension Protection Act
effective December 31, 2006.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------



The following table summarizes the weighted average assumptions used to calculate the benefit obligation of the NFN pension plans as of the December 31 measurement date:



|                                               |  |      |   |  |      |  
|---------------------------------------------- |  | ---- | - |  | ---- | -
|                                               |  | 2007 |   |  | 2006 |  
|Discount rate                                  |  | 5.25 | % |  | 5.25 | %
|Rate of increase in future compensation levels |  | 4.75 | % |  | 4.75 | %



The
following table summarizes the asset allocation for the NFN qualified pension plan at the end of 2007 and 2006 and the target allocation for 2008, by asset category:



|                  |  |                           |   |  |                             |   |  |         
|----------------- |  | ------------------------- | - |  | --------------------------- | - |  | --------
|                  |  | Percentage of plan assets |   |  | Targetallocation percentage
|Asset Category    |  | 2007                      |   |  | 2006                        |   |  | 2008    
|Equity securities |  | 64                        | % |  | 67                          | % |  | 62 - 68%
|Debt securities   |  | 36                        | % |  | 33                          | % |  | 32 - 38%
|Other             |  |                          |   |  |                            |   |  | 0 - 10% 
|                  |  |                           |   |  |                             |   |  |         
|Total             |  | 100                       | % |  | 100                         | % |  |         
|                  |  |                           |   |  |                             |   |  |         



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Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



The NFN pension plans employ a total return investment approach using a mix of
equities and fixed income investments to maximize the long-term return of plan assets in exchange for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities and funded status. On a quarterly basis,
the portfolio of investments within the annuity contract issued by NFN is analyzed in light of current market conditions and rebalanced to match the target allocations.



The NFN pension plans employ a prospective building block approach in determining the expected long-term rate of return on
plan assets. This process is integrated with the determination of other economic assumptions such as discount rate and salary scale. Historical markets are studied, and long-term historical relationships between equities and fixed income investments
are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run (called a risk premium). Historical risk premiums are used to develop expected real rates of
return for each asset sub-class. The expected real rates of return, reduced for investment expenses, are applied to the target allocation of each asset sub-class to produce an expected real rate of return for the target portfolio. This expected real
rate of return will vary by plan and will change when the plans target investment portfolio changes. Current market factors such as inflation and interest rates are incorporated into the process. For a given measurement date, the discount rate
is set by reference to the yield on high-quality corporate bonds to approximate the rate at which plan benefits could effectively be settled. For December 31, 2007 and 2006, the reference bond portfolio was the Moodys Investors Service,
Inc. AA long-term corporate bond index. For pension benefits, a downward adjustment to the discount rate of 0.50% to 0.75% was included for plan administration and other expenses. The historical real rate of return is subtracted from these bonds to
generate an assumed inflation rate. The expected long-term rate of return on plan assets is the assumed inflation rate plus the expected real rate of return. This process effectively sets the expected return for the plans portfolio at the
yield for the reference bond portfolio, adjusted for expected risk premiums of the target asset portfolio. Given the prospective nature of this calculation, short-term fluctuations in the market do not impact the expected risk premiums. However, as
the yield for the reference bond fluctuates, the assumed inflation rate and the expected long-term rate are adjusted in tandem.



Effective December 31, 2005, the historical risk premiums and expected real rates of return were re-evaluated affecting
December 31, 2005 benefit obligations and 2006 costs. For benefits obligations, a lower real rate of return on corporate bonds led to a higher implied inflation rate and a higher rate of future compensation increase, which was 4.25% at
December 31, 2005.



In addition, the
Company and certain affiliated companies, including NFN, participate in life and health care defined benefit plans sponsored by NMIC for qualifying retirees. Postretirement life and health care benefits are contributory. The level of contribution
required by a qualified retiree depends on the retirees years of service and date of hire. In general, postretirement benefits are available to full-time employees who are credited with 120 months of retiree life and health service.
Postretirement health care benefit contributions are adjusted annually and contain cost-sharing features such as deductibles and coinsurance. In addition, there are caps on the Companys portion of the per-participant cost of the postretirement
health care benefits. The Companys policy is to fund the cost of health care benefits in amounts determined at the discretion of management. Plan assets are invested primarily in group annuity contracts issued by NLIC. The Companys
portion of expense relating to these plans was immaterial for the years ended December 31, 2007, 2006 and 2005.



Defined Contribution Plans



NMIC sponsors a defined contribution retirement savings plan covering substantially all employees of the Company. Employees may make
salary deferral contributions of up to 80%. With the exception of NFN agents, salary deferrals of up to 6% are subject to a 50% Company match. The Companys expense for contributions to these plans was $8.2 million, $7.4 million and $7.3
million for the years ended December 31, 2007, 2006 and 2005, respectively.



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Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



NFN also provides a funded noncontributory defined contribution plan that covers
substantially all of its agents. The Companys expense for contributions to this plan was $0.7 million, $0.7 million and $0.6 million for the years ended December 31, 2007, 2006 and 2005, respectively.



(17) Related Party Transactions



The Company has entered into significant, recurring
transactions and agreements with NMIC, other affiliates and subsidiaries as a part of its ongoing operations. These include annuity and life insurance contracts, office space leases, and agreements related to reinsurance, cost sharing,
administrative services, marketing, intercompany loans, intercompany repurchases, cash management services and software licensing. Measures used to allocate expenses among companies include individual employee estimates of time spent, special cost
studies, the number of full-time employees, commission expense and other methods agreed to by the participating companies.



In addition, Nationwide Services Company, LLC (NSC), a subsidiary of NMIC, provides computer, telephone, mail, employee benefits
administration and other services to NMIC and certain of its direct and indirect subsidiaries, including the Company, based on specified rates for units of service consumed. For the years ended December 31, 2007, 2006 and 2005, the Company made
payments to NMIC and NSC totaling $288.5 million, $264.5 million and $314.7 million, respectively.



The Company has issued group annuity and life insurance contracts and performs administrative services for various employee benefit plans sponsored by NMIC or its affiliates. Total account values
of these contracts were $3.06 billion and $5.64 billion as of December 31, 2007 and 2006, respectively. Total revenues from these contracts were $132.3 million, $139.3 million and $141.9 million for the years ended December 31, 2007, 2006
and 2005, respectively, and include policy charges, net investment income from investments backing the contracts and administrative fees. Total interest credited to the account balances was $110.1 million, $111.4 million and $108.3 million for the
years ended December 31, 2007, 2006 and 2005, respectively. The terms of these contracts are materially consistent with what the Company offers to unaffiliated parties who are similarly situated.



The Company leases office space from NMIC. For the years
ended December 31, 2007, 2006 and 2005, the Company made lease payments to NMIC of $24.4 million, $19.3 million and $18.7 million, respectively.



NLIC has a reinsurance agreement with NMIC whereby all of NLICs accident and health business not ceded to unaffiliated reinsurers is
ceded to NMIC on a modified coinsurance basis. Either party may terminate the agreement on January 1 of any year with prior notice. Under a modified coinsurance agreement, the ceding company retains invested assets, and investment earnings are
paid to the reinsurer. Under the terms of NLICs agreements, the investment risk associated with changes in interest rates is borne by the reinsurer. The ceding of risk does not discharge the original insurer from its primary obligation to the
policyholder. The Company believes that the terms of the modified coinsurance agreements are consistent in all material respects with what the Company could have obtained with unaffiliated parties. Revenues ceded to NMIC for the years ended
December 31, 2007, 2006 and 2005 were $317.6 million, $430.8 million and $429.5 million, respectively, while benefits, claims and expenses ceded during these years were $348.1 million, $470.4 million and $398.8 million, respectively.



Under a marketing agreement with NMIC, NLIC
makes payments to cover a portion of the agent marketing allowance that is paid to Nationwide agents. These costs cover product development and promotion, sales literature, rent and similar items. Payments under this agreement totaled $20.1 million,
$28.3 million and $26.5 million for the years December 31, 2007, 2006 and 2005, respectively.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



The Company also participates in intercompany repurchase agreements with affiliates
whereby the seller transfers securities to the buyer at a stated value. Upon demand or after a stated period, the seller repurchases the securities at the original sales price plus interest. As of December 31, 2007 and 2006, the Company had no
outstanding borrowings from affiliated entities under such agreements. During 2007, 2006 and 2005, the most the Company had outstanding at any given time was $178.2 million, $191.5 million and $55.3 million, respectively, and the amounts the Company
incurred for interest expense on intercompany repurchase agreements during these years were immaterial.



The Company and various affiliates entered into agreements with Nationwide Cash Management Company (NCMC), an affiliate, under which NCMC
acts as a common agent in handling the purchase and sale of short-term securities for the respective accounts of the participants. Amounts on deposit with NCMC for the benefit of the Company were $473.0 million and $869.6 million as of
December 31, 2007 and 2006, respectively, and are included in short-term investments on the consolidated balance sheets.



The Company and an affiliate are currently developing a browser-based policy administration and online brokerage software application for
defined benefit plans. In connection with the development of this application, the Company made net payments, which were expensed, to that affiliate related to development totaling $13.0 million, $9.5 million and $4.1 million for the years ended
December 31, 2007, 2006 and 2005, respectively.



Through September 30, 2002, the Company filed a consolidated federal income tax return with NMIC, as described in Note 13. Effective October 1, 2002, NFS began filing a consolidated federal tax return with its non-life insurance
company subsidiaries. There were no payments (from) to NMIC for the year ended December 31, 2007 compared to $(16.3) million and $45.0 million for the years ended December 31, 2006 and 2005, respectively. These payments related to tax
years prior to deconsolidation.



(18) Contingencies



Legal Matters



The Company is a party to litigation and arbitration
proceedings in the ordinary course of its business. It is often not possible to determine the ultimate outcome of the pending investigations and legal proceedings or to provide reasonable ranges of potential losses with any degree of certainty. Some
matters, including certain of those referred to below, are in very preliminary stages, and the Company does not have sufficient information to make an assessment of the plaintiffs claims for liability or damages. In some of the cases seeking
to be certified as class actions, the court has not yet decided whether a class will be certified or (in the event of certification) the size of the class and class period. In many of the cases, the plaintiffs are seeking undefined amounts of
damages or other relief, including punitive damages and equitable remedies, which are difficult to quantify and cannot be defined based on the information currently available. The Company does not believe, based on information currently known by
management, that the outcomes of such pending investigations and legal proceedings are likely to have a material adverse effect on the Companys consolidated financial position. However, given the large and/or indeterminate amounts sought in
certain of these matters and inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could have a material adverse effect on the Companys consolidated financial results in a particular quarterly or
annual period.



In recent years, life insurance
companies have been named as defendants in lawsuits, including class action lawsuits relating to life insurance and annuity pricing and sales practices. A number of these lawsuits have resulted in substantial jury awards or settlements against life
insurers other than the Company.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



The financial services industry, including mutual fund, variable annuity, retirement
plan, life insurance and distribution companies, has also been the subject of increasing scrutiny by regulators, legislators and the media over the past few years. Numerous regulatory agencies, including the SEC, the Financial Industry Regulatory
Authority and the New York State Attorney General, have commenced industry-wide investigations regarding late trading and market timing in connection with mutual funds and variable insurance contracts, and have commenced enforcement actions against
some mutual fund and life insurance companies on those issues. The Company has been contacted by or received subpoenas from the SEC and the New York State Attorney General, who are investigating market timing in certain mutual funds offered in
insurance products sponsored by the Company. The Company has cooperated with these investigations. Information requests from the New York State Attorney General and the SEC with respect to investigations into late trading and market timing were last
responded to by the Company and its affiliates in December 2003 and June 2005, respectively, and no further information requests have been received with respect to these matters.



In addition, state and federal regulators and other governmental bodies have commenced investigations,
proceedings or inquiries relating to compensation and bidding arrangements and possible anti-competitive activities between insurance producers and brokers and issuers of insurance products, and unsuitable sales and replacements by producers on
behalf of the issuer. Also under investigation are compensation and revenue sharing arrangements between the issuers of variable insurance contracts and mutual funds or their affiliates, fee arrangements in retirement plans, the use of side
agreements and finite reinsurance agreements, funding agreements issued to back medium-term note (MTN) programs, recordkeeping and retention compliance by broker/dealers, and supervision of former registered representatives. Related investigations,
proceedings or inquiries may be commenced in the future. The Company and/or its affiliates have been contacted by or received subpoenas from state and federal regulatory agencies and other governmental bodies, state securities law regulators and
state attorneys general for information relating to certain of these investigations, including those relating to compensation, revenue sharing and bidding arrangements, anti-competitive activities, unsuitable sales or replacement practices, fee
arrangements in retirement plans, the use of side agreements and finite reinsurance agreements, and funding agreements backing the NLIC MTN program. The Company is cooperating with regulators in connection with these inquiries and will cooperate
with NMIC in responding to these inquiries to the extent that any inquiries encompass NMICs operations.



These proceedings are expected to continue in the future and could result in legal precedents and new industry-wide legislation, rules and
regulations that could significantly affect the financial services industry, including mutual fund, retirement plan, life insurance and annuity companies. These proceedings also could affect the outcome of one or more of the Companys
litigation matters. There can be no assurance that any litigation or regulatory actions will not have a material adverse effect on the Company in the future.



On November 20, 2007, NLIC and NRS were named in a lawsuit filed in the Circuit Court of Jefferson County, Alabama entitled Ruth
A. Gwin and Sandra H. Turner, and a class of similarly situated individuals v NLIC, NRS, Alabama State Employees Association, PEBCO, Inc. and Fictitious Defendants A to Z. The plaintiffs purport to represent a class of all participants in the
Alabama State Employees Association (ASEA) plan, excluding members of the Board of Control during the Class Period and excluding ASEAs directors, officers and board members during the class period. The class period is the date from which NLIC
and/or NRS first made a payment to ASEA or PEBCO arising out of the funding agreement dated March 24, 2004 to the date class notice is provided. The plaintiffs allege that the defendants breached their fiduciary duties, converted plan
participants properties, and breached their contract when payments were made and the plan was administered under the funding agreement. The complaint seeks a declaratory judgment, an injunction, disgorgement of amounts paid, compensatory and
punitive damages, interest, attorneys fees and costs, and such other equitable and legal relief to which the plaintiffs and class members may be entitled. On January 9, 2008, NLIC and NRS



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



filed a Notice of Removal to the United States District Court Northern District of Alabama, Southern Division. On January 16, 2008, NLIC and NRS filed a
motion to dismiss. On January 24, 2008, the plaintiffs filed a motion to remand. The motions have been fully briefed. NLIC and NRS intend to defend this case vigorously.



On July 11, 2007, NLIC was named in a lawsuit filed in the United States District Court for the Western
District of Washington at Tacoma entitled Jerre Daniels-Hall and David Hamblen, Individually and on behalf of All Others Similarly Situated v. National Education Association, NEA Member Benefits Corporation, Nationwide Life Insurance Company,
Security Benefit Life Insurance Company, Security Benefit Group, Inc., Security Distributors, Inc., et. al. The plaintiffs seek to represent a class of all current or former National Education Association (NEA) members who participated in the
NEA Valuebuilder 403(b) program at any time between January 1, 1991 and the present (and their heirs and/or beneficiaries). The plaintiffs allege that the defendants violated the Employee Retirement Income Security Act of 1974, as amended
(ERISA) by failing to prudently and loyally manage plan assets, by failing to provide complete and accurate information, by engaging in prohibited transactions, and by breaching their fiduciary duties when they failed to prevent other fiduciaries
from breaching their fiduciary duties. The complaint seeks to have the defendants restore all losses to the plan, restoration of plan assets and profits to participants, disgorgement of endorsement fees, disgorgement of service fee payments,
disgorgement of excessive fees charged to plan participants, other unspecified relief for restitution, declaratory and injunctive relief, and attorneys fees. On October 12, 2007, NLIC filed a motion to dismiss. The motion has been fully
briefed. NLIC intends to defend this lawsuit vigorously.



On November 15, 2006, NFS, NLIC and NRS were named in a lawsuit filed in the United States District Court for the Southern District of Ohio entitled Kevin Beary, Sheriff of Orange County, Florida, In His
Official Capacity, Individually and On Behalf of All Others Similarly Situated v. Nationwide Life Insurance Co., Nationwide Retirement Solutions, Inc. and Nationwide Financial Services, Inc. The plaintiff seeks to represent a class of all
sponsors of 457(b) deferred compensation plans in the United States that had variable annuity contracts with the defendants at any time during the class period, or in the alternative, all sponsors of 457(b) deferred compensation plans in Florida
that had variable annuity contracts with the defendants during the class period. The class period is from January 1, 1996 until the class notice is provided. The plaintiff alleges that the defendants breached their fiduciary duties by arranging
for and retaining service payments from certain mutual funds. The complaint seeks an accounting, a declaratory judgment, a permanent injunction and disgorgement or restitution of the service fee payments allegedly received by the defendants,
including interest. On January 25, 2007, NFS, NLIC and NRS filed a motion to dismiss. On September 17, 2007, the Court granted the motion to dismiss. On October 1, 2007, the plaintiff filed a motion to vacate judgment and for leave to
file an amended complaint. On October 25, 2007, NFS, NLIC and NRS filed their opposition to the plaintiffs motion. NFS, NLIC and NRS continue to defend this lawsuit vigorously.



On February 11, 2005, NLIC was named in a class action lawsuit filed in Common Pleas Court, Franklin
County, Ohio entitled Michael Carr v. Nationwide Life Insurance Company. The plaintiff claims that the total of modal payments that policyholders paid per year exceeded the guaranteed maximum premium provided for in the policy. The complaint
seeks recovery for breach of contract, fraud by omission, violation of the Ohio Deceptive Trade Practices Act and unjust enrichment. The complaint also seeks unspecified compensatory damages, disgorgement of all amounts in excess of the guaranteed
maximum premium and attorneys fees. On February 2, 2006, the court granted the plaintiffs motion for class certification on the breach of contract and unjust enrichment claims. The court certified a class consisting of all residents
of the United States and the Virgin Islands who, during the class period, paid premiums on a modal basis to NLIC for term life insurance policies issued by NLIC during the class period that provide for guaranteed maximum premiums, excluding certain
specified products. Excluded from the class are NLIC; any parent, subsidiary or affiliate of NLIC; all employees, officers and directors of NLIC; and any justice, judge or magistrate judge of the State of Ohio who may hear the



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



case. The class period is from February 10, 1990 through February 2, 2006, the date the class was certified. On January 26, 2007, the
plaintiff filed a motion for summary judgment. On April 30, 2007, NLIC filed a motion for summary judgment. On February 4, 2008, the Court entered its ruling on the parties pending motions for summary judgment. The Court granted
NLICs motion for summary judgment for some of the plaintiffs causes of action, including breach of contract claims on all decreasing term policies, plaintiff Carrs individual claims for fraud by omission, violation of the Ohio
Deceptive Trade Practices Act and all unjust enrichment claims. However, several claims against NLIC remain, including plaintiff Carrs individual claim for breach of contract and the plaintiff Class claims for breach of contract for the
term life policies in 43 of 51 jurisdictions. The Court has requested additional briefing on NLICs affirmative defense that the doctrine of voluntary payment acts as a defense to the breach of contract claims. NLIC continues to defend this
lawsuit vigorously.



On April 13, 2004,
NLIC was named in a class action lawsuit filed in Circuit Court, Third Judicial Circuit, Madison County, Illinois, entitled Woodbury v. Nationwide Life Insurance Company. NLIC removed this case to the United States District Court for the
Southern District of Illinois on June 1, 2004. On December 27, 2004, the case was transferred to the United States District Court for the District of Maryland and included in the multi-district proceeding entitled In Re Mutual Funds
Investment Litigation. In response, on May 13, 2005, the plaintiff filed the first amended complaint purporting to represent, with certain exceptions, a class of all persons who held (through their ownership of an NLIC annuity or insurance
product) units of any NLIC sub-account invested in mutual funds that included foreign securities in their portfolios and that experienced market timing or stale price trading activity. The first amended complaint purports to disclaim, with respect
to market timing or stale price trading in NLICs annuities sub-accounts, any allegation based on NLICs untrue statement, failure to disclose any material fact, or usage of any manipulative or deceptive device or contrivance in connection
with any class members purchases or sales of NLIC annuities or units in annuities sub-accounts. The plaintiff claims, in the alternative, that if NLIC is found with respect to market timing or stale price trading in its annuities sub-accounts,
to have made any untrue statement, to have failed to disclose any material fact or to have used or employed any manipulative or deceptive device or contrivance, then the plaintiff purports to represent a class, with certain exceptions, of all
persons who, prior to NLICs untrue statement, omission of material fact, use or employment of any manipulative or deceptive device or contrivance, held (through their ownership of an NLIC annuity or insurance product) units of any NLIC
sub-account invested in mutual funds that included foreign securities in their portfolios and that experienced market timing activity. The first amended complaint alleges common law negligence and seeks to recover damages not to exceed $75,000 per
plaintiff or class member, including all compensatory damages and costs. On June 1, 2006, the District Court granted NLICs motion to dismiss the plaintiffs complaint. The plaintiff appealed the District Courts decision, and
the issues have been fully briefed. NLIC continues to defend this lawsuit vigorously.



On August 15, 2001, NFS and NLIC were named in a lawsuit filed in the United States District Court for the District of Connecticut entitled Lou Haddock, as trustee of the Flyte
Tool & Die, Incorporated Deferred Compensation Plan, et al v. Nationwide Financial Services, Inc. and Nationwide Life Insurance Company. Currently, the plaintiffs fifth amended complaint, filed March 21, 2006, purports to
represent a class of qualified retirement plans under ERISA that purchased variable annuities from NLIC. The plaintiffs allege that they invested ERISA plan assets in their variable annuity contracts and that NLIC and NFS breached ERISA fiduciary
duties by allegedly accepting service payments from certain mutual funds. The complaint seeks disgorgement of some or all of the payments allegedly received by NFS and NLIC, other unspecified relief for restitution, declaratory and injunctive
relief, and attorneys fees. To date, the District Court has rejected the plaintiffs request for certification of the alleged class. On September 25, 2007, NFS and NLICs motion to dismiss the plaintiffs fifth
amended complaint was denied. On October 12, 2007, NFS and NLIC filed their answer to the plaintiffs fifth amended complaint and amended counterclaims. On November 1, 2007, the plaintiffs filed a motion to dismiss NFS and
NLICs amended counterclaims. On November 15, 2007, the plaintiffs filed a motion for class certification. On February 8, 2008, the Court denied the plaintiffs motion to dismiss the amended counterclaim, with the exception that it
was tentatively granting the plaintiffs motion to dismiss with respect



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Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



to NFS and NLICs claim that it could recover any disgorgement remedy from plan sponsors. NFS and NLIC continue to defend this lawsuit
vigorously.



On October 9, 2003, NLICA was
named as one of twenty-six defendants in a lawsuit filed in the United States District Court for the Middle District of Pennsylvania entitled Steven L. Flood, Luzerne County Controller and the Luzerne County Retirement Board on behalf of the
Luzerne County Employee Retirement System v. Thomas A. Makowski, Esq., et al. NLICA is a defendant as the successor in interest to Provident Mutual Life Insurance Company, which is alleged to have entered into four agreements to manage assets
and investments of the Luzerne County Employee Retirement System (the Plan). In their complaint, the plaintiffs alleged that NLICA aided and abetted certain other defendants in breaching their fiduciary duties to the Plan. The plaintiffs also
alleged that NLICA violated the Federal Racketeer Influenced and Corrupt Organizations Act by engaging in and conspiring to engage in an improper scheme to mismanage funds in order to collect excessive fees and commissions and that NLICA was
unjustly enriched by the allegedly excessive fees and commissions. The complaint seeks treble compensatory damages, punitive damages, a full accounting, imposition of a constructive trust on all funds paid by the Plan to all defendants, pre- and
post-judgment interest, and costs and disbursements, including attorneys fees. On November 27, 2007, the court granted NLICAs motion for summary judgment and dismissed all of the federal claims with prejudice. The court declined to
exercise jurisdiction over the state claims and dismissed those without prejudice. The plaintiffs have elected not to appeal the courts decision.



Tax Matters



Management has established tax reservesin accordance with the requirements of FIN 48. See Note 3 for a summary of the provisions
of FIN 48. These reserves are reviewed regularly and are adjusted as events occur that management believes impact its liability for additional taxes, such as lapsing of applicable statutes of limitations; conclusion of tax audits or substantial
agreement on the deductibility/nondeductibility of uncertain items; additional exposure based on current calculations; identification of new issues; release of administrative guidance; or rendering of a court decision affecting a particular tax
issue. Management believes its tax reserves reasonably provide for potential assessments that may result from IRS examinations and other tax-related matters for all open tax years.



The separate account DRD is a significant component of the Companys federal income tax provision. On
August 16, 2007, the IRS issued Revenue Ruling 2007-54. This ruling took a position with respect to the DRD that could have significantly reduced the Companys DRD. The Company believes that the position taken by the IRS in the ruling was
contrary to existing law and the relevant legislative history.



In Revenue Ruling 2007-61, released September 25, 2007, the IRS and the U.S. Department of the Treasury suspended Revenue Ruling 2007-54 and informed taxpayers of their intention to address certain issues in
connection with the DRD in future tax regulations. Final tax regulations could impact the Companys DRD in periods subsequent to their effective date.



(19) Guarantees



Since 2001, the Company has sold $677.2 million of credit enhanced equity interests in Low-Income-Housing Tax Credit Funds (Tax Credit
Funds) to unrelated third parties. The Company has guaranteed cumulative after-tax yields to the third party investors ranging from 3.75% to 5.25% over periods ending between 2002 and 2022. As of December 31, 2007, the Company held guarantee
reserves totaling $6.0 million on these transactions. These guarantees are in effect for periods of approximately 15 years each. The Tax Credit Funds provide a stream of tax benefits to the investors that will generate a yield and return of capital.
If the tax benefits are not sufficient to provide these cumulative after-tax yields, then the Company must fund any shortfall, which



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



is mitigated by stabilization collateral set aside by the Company at the inception of the transactions. The maximum amount of undiscounted future payments
that the Company could be required to pay the investors under the terms of the guarantees is $1.28 billion. The Company does not anticipate making any material payments related to these guarantees.



As of December 31, 2007, the Company held stabilization
reserves of $1.6 million as collateral for certain properties owned by the Tax Credit Funds that had not met all of the criteria necessary to generate tax credits. Such criteria include completion of construction and the leasing of each unit to a
qualified tenant, among others. Properties meeting the necessary criteria are considered to have stabilized. The properties are evaluated regularly, and the collateral is released when stabilized.



To the extent there are cash deficits in any specific
property owned by the Tax Credit Funds, property reserves, property operating guarantees and reserves held by the Tax Credit Funds are exhausted before the Company is required to perform under its guarantees. To the extent the Company is ever
required to perform under its guarantees, it may recover any such funding out of the cash flow distributed from the sale of the underlying properties of the Tax Credit Funds. This cash flow distribution would be paid to the Company prior to any cash
flow distributions to unrelated third party investors.



(20) Variable
Interest Entities



As of December 31,
2007 and 2006, the Company had relationships with 19 and 18 variable interest entities (VIEs), respectively, each of which the Company was the primary beneficiary. Each VIE is a conduit that assists the Company in structured products transactions
involving the sale of Tax Credit Funds to third party investors for which the Company provides guaranteed returns (see Note 19). The results of operations and financial position of these VIEs are included along with corresponding minority interest
liabilities in the accompanying consolidated financial statements.



VIE net assets were $465.7 million and $445.5 million as of December 31, 2007 and 2006, respectively. The following table summarizes the components of net assets as of December 31:



|                            |  |      |       |   |      |   |       |  
|--------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|(in millions)               |  | 2007 |       |   | 2006 |  
|Other long-term investments |  | $    | 434.1 |   |      | $ | 432.5 |  
|Short-term investments      |  |      | 31.9  |   |      |   | 33.7  |  
|Other assets                |  |      | 38.1  |   |      |   | 37.8  |  
|Other liabilities           |  |      | (38.4 | ) |      |   | (58.5 | )



The
Companys total loss exposure from VIEs of which the Company is the primary beneficiary was immaterial as of December 31, 2007 and 2006 (except for the impact of guarantees disclosed in Note 19).



In addition to the VIEs described above, the Company holds
variable interests, in the form of limited partnerships or similar investments, in Tax Credit Funds of which the Company is not the primary beneficiary. These investments have been held by the Company for periods of 1 to 10 years and allow the
Company to utilize certain tax credits and realize other tax benefits from affordable housing projects. The Company also has certain investments in other securitization transactions that qualify as VIEs, but of which the Company is not the primary
beneficiary. The total exposure to loss on these VIEs was $254.1 million and $175.0 million as of December 31, 2007 and 2006, respectively.



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Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



(21) Segment Information



Management views the Companys business primarily based on its underlying products and uses this basis
to define its four reportable segments: Individual Investments, Retirement Plans, Individual Protection, and Corporate and Other.



The primary segment profitability measure that management uses is pre-tax operating earnings, which is calculated by adjusting income from
continuing operations before federal income taxes and discontinued operations to exclude: (1) net realized investment gains and losses, except for operating items (periodic net amounts paid or received on interest rate swaps that do not qualify
for hedge accounting treatment, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations); and (2) the adjustment to amortization of DAC and VOBA related to
net realized investment gains and losses.



Individual
Investments



The Individual Investments segment consists of individual The BEST of AMERICA® and private label deferred variable annuity products, individual annuity
products, deferred fixed annuity products, income products and investment advisory services. Individual deferred annuity contracts provide the customer with tax-deferred accumulation of savings and flexible payout options including lump sum,
systematic withdrawal or a stream of payments for life. In addition, individual variable annuity contracts provide the customer with access to a wide range of investment options and asset protection features, while individual fixed annuity contracts
generate a return for the customer at a specified interest rate fixed for prescribed periods.



Retirement Plans



The Retirement Plans segment is comprised of the Companys private and public sector retirement plans business. The private sector primarily includes IRC Section 401 fixed and variable group annuity business
generated through NLIC and trust and custodial services through Nationwide Trust Company, FSB, a division of Nationwide Bank. Also included in the private sector is Registered Investment Advisors Services, Inc. d/b/a RIA Services Inc., which
facilitates professional money management of participant assets by registered investment advisors. The public sector primarily includes IRC Section 457 and Section 401(a) business in the form of full-service arrangements that provide plan
administration and fixed and variable group annuities as well as administration-only business.



Individual Protection



The Individual Protection segment consists of investment life insurance products, including individual variable, COLI and BOLI products; traditional life insurance products; and universal life insurance products. Life
insurance products provide a death benefit and generally allow the customer to build cash value on a tax-advantaged basis.



Corporate and Other



The Corporate and Other segment includes the MTN program; the retail operations of Nationwide Bank; structured products business; revenues
and expenses of the Companys retail asset management business and non-insurance subsidiaries not reported in other segments; and other revenues and expenses not allocated to other segments.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



The following tables summarize the Companys business segment operating results
for the years ended December 31:



|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|------------------------------------------------------------------------------------ |  | --------------------- | -------- | --------------- | - | -------------------- |  | ------------------ | -------- |  | ----- | -------- | - |  | - | --------- | -
|(in millions)                                                                        |  | IndividualInvestments |          | RetirementPlans |   | IndividualProtection |  | Corporateand Other |          |  | Total |         
|2007                                                                                 |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Revenues:                                                                            |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Policy charges                                                                       |  | $                     | 662.6    |                 | $ | 147.3                |  | $                  | 574.0    |  | $     |         |   |  | $ | 1,383.9   |  
|Premiums                                                                             |  |                       | 133.3    |                 |   |                     |  |                    | 299.4    |  |       |         |   |  |   | 432.7     |  
|Net investment income                                                                |  |                       | 642.9    |                 |   | 655.2                |  |                    | 472.3    |  |       | 506.3    |   |  |   | 2,276.7   |  
|Non-operating net realized investment losses1                                        |  |                       |         |                 |   |                     |  |                    |         |  |       | (152.8   | ) |  |   | (152.8    | )
|Other income                                                                         |  |                       | 31.0     |                 |   | 343.7                |  |                    | 4.0      |  |       | 209.7    |   |  |   | 588.4     |  
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Total revenues                                                                       |  |                       | 1,469.8  |                 |   | 1,146.2              |  |                    | 1,349.7  |  |       | 563.2    |   |  |   | 4,528.9   |  
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Benefits and expenses:                                                               |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Interest credited to policyholder accounts                                           |  |                       | 444.3    |                 |   | 443.3                |  |                    | 192.0    |  |       | 262.4    |   |  |   | 1,342.0   |  
|Benefits and claims                                                                  |  |                       | 233.5    |                 |   |                     |  |                    | 449.4    |  |       |         |   |  |   | 682.9     |  
|Policyholder dividends                                                               |  |                       |         |                 |   |                     |  |                    | 83.1     |  |       |         |   |  |   | 83.1      |  
|Amortization of DAC                                                                  |  |                       | 287.1    |                 |   | 27.4                 |  |                    | 93.1     |  |       | (25.5    | ) |  |   | 382.1     |  
|Amortization of VOBA                                                                 |  |                       | 5.3      |                 |   | 2.2                  |  |                    | 39.3     |  |       | 0.2      |   |  |   | 47.0      |  
|Interest expense                                                                     |  |                       |         |                 |   |                     |  |                    |         |  |       | 110.6    |   |  |   | 110.6     |  
|Debt extinguishment costs                                                            |  |                       |         |                 |   |                     |  |                    |         |  |       | 10.2     |   |  |   | 10.2      |  
|Other operating expenses                                                             |  |                       | 198.9    |                 |   | 420.7                |  |                    | 193.0    |  |       | 258.0    |   |  |   | 1,070.6   |  
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Total benefits and expenses                                                          |  |                       | 1,169.1  |                 |   | 893.6                |  |                    | 1,049.9  |  |       | 615.9    |   |  |   | 3,728.5   |  
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Income (loss) from continuing operations before federal income tax expense           |  |                       | 300.7    |                 |   | 252.6                |  |                    | 299.8    |  |       | (52.7    | ) |  | $ | 800.4     |  
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Less: non-operating net realized investment losses1                                  |  |                       |         |                 |   |                     |  |                    |         |  |       | 152.8    |   |  |   |           |  
|Less: adjustment to amortization related to net realized investment gains and losses |  |                       |         |                 |   |                     |  |                    |         |  |       | (25.5    | ) |  |   |           |  
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Pre-tax operating earnings                                                           |  | $                     | 300.7    |                 | $ | 252.6                |  | $                  | 299.8    |  | $     | 74.6     |   |  |   |           |  
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Assets as of year end                                                                |  | $                     | 56,555.8 |                 | $ | 27,956.6             |  | $                  | 22,920.6 |  | $     | 11,774.1 |   |  | $ | 119,207.1 |  
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  



|1 | Excluding operating items (periodic net amounts paid or received on interest rate swaps that do not qualify for hedge
accounting treatment, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations).
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|------------------------------------------------------------------------------------ |  | --------------------- | -------- | --------------- | - | -------------------- |  | ------------------ | -------- |  | ----- | -------- | - |  | - | --------- | -
|(in millions)                                                                        |  | IndividualInvestments |          | RetirementPlans |   | IndividualProtection |  | Corporateand Other |          |  | Total |         
|2006                                                                                 |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Revenues:                                                                            |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Policy charges                                                                       |  | $                     | 588.4    |                 | $ | 174.5                |  | $                  | 553.1    |  | $     |         |   |  | $ | 1,316.0   |  
|Premiums                                                                             |  |                       | 142.5    |                 |   |                     |  |                    | 299.0    |  |       |         |   |  |   | 441.5     |  
|Net investment income                                                                |  |                       | 781.1    |                 |   | 652.2                |  |                    | 468.1    |  |       | 398.8    |   |  |   | 2,300.2   |  
|Non-operating net realized investment losses1                                        |  |                       |         |                 |   |                     |  |                    |         |  |       | (0.6     | ) |  |   | (0.6      | )
|Other income                                                                         |  |                       | 14.6     |                 |   | 288.9                |  |                    | 0.8      |  |       | 201.1    |   |  |   | 505.4     |  
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Total revenues                                                                       |  |                       | 1,526.6  |                 |   | 1,115.6              |  |                    | 1,321.0  |  |       | 599.3    |   |  |   | 4,562.5   |  
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Benefits and expenses:                                                               |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Interest credited to policyholder accounts                                           |  |                       | 528.3    |                 |   | 451.6                |  |                    | 191.7    |  |       | 209.9    |   |  |   | 1,381.5   |  
|Benefits and claims                                                                  |  |                       | 202.4    |                 |   |                     |  |                    | 444.4    |  |       |         |   |  |   | 646.8     |  
|Policyholder dividends                                                               |  |                       |         |                 |   |                     |  |                    | 90.7     |  |       |         |   |  |   | 90.7      |  
|Amortization of DAC                                                                  |  |                       | 352.7    |                 |   | 38.3                 |  |                    | 81.6     |  |       | (9.7     | ) |  |   | 462.9     |  
|Amortization of VOBA                                                                 |  |                       | 6.5      |                 |   | 6.9                  |  |                    | 32.6     |  |       |         |   |  |   | 46.0      |  
|Interest expense                                                                     |  |                       |         |                 |   |                     |  |                    |         |  |       | 103.1    |   |  |   | 103.1     |  
|Other operating expenses                                                             |  |                       | 213.6    |                 |   | 397.6                |  |                    | 199.2    |  |       | 221.8    |   |  |   | 1,032.2   |  
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Total benefits and expenses                                                          |  |                       | 1,303.5  |                 |   | 894.4                |  |                    | 1,040.2  |  |       | 525.1    |   |  |   | 3,763.2   |  
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Income from continuing operations before federal income tax expense                  |  |                       | 223.1    |                 |   | 221.2                |  |                    | 280.8    |  |       | 74.2     |   |  | $ | 799.3     |  
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Less: non-operating net realized investment losses1                                  |  |                       |         |                 |   |                     |  |                    |         |  |       | 0.6      |   |  |   |           |  
|Less: adjustment to amortization related to net realized investment gains and losses |  |                       |         |                 |   |                     |  |                    |         |  |       | (9.7     | ) |  |   |           |  
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Pre-tax operating earnings                                                           |  | $                     | 223.1    |                 | $ | 221.2                |  | $                  | 280.8    |  | $     | 65.1     |   |  |   |           |  
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Assets as of year end                                                                |  | $                     | 56,516.6 |                 | $ | 30,317.9             |  | $                  | 22,194.6 |  | $     | 10,502.0 |   |  | $ | 119,531.1 |  
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  



|1 | Excluding operating items (periodic net amounts paid or received on interest rate swaps that do not qualify for hedge
accounting treatment, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations).
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|------------------------------------------------------------------------------------ |  | --------------------- | -------- | --------------- | - | -------------------- |  | ------------------ | -------- |  | ----- | -------- | - |  | - | ---------
|(in millions)                                                                        |  | IndividualInvestments |          | RetirementPlans |   | IndividualProtection |  | Corporateand Other |          |  | Total
|2005                                                                                 |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Revenues:                                                                            |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Policy charges                                                                       |  | $                     | 540.2    |                 | $ | 154.7                |  | $                  | 546.6    |  | $     |         |   |  | $ | 1,241.5  
|Premiums                                                                             |  |                       | 102.9    |                 |   |                     |  |                    | 297.0    |  |       |         |   |  |   | 399.9    
|Net investment income                                                                |  |                       | 869.9    |                 |   | 661.4                |  |                    | 475.1    |  |       | 337.7    |   |  |   | 2,344.1  
|Non-operating net realized investment gains1                                         |  |                       |         |                 |   |                     |  |                    |         |  |       | 18.2     |   |  |   | 18.2     
|Other income                                                                         |  |                       | 15.2     |                 |   | 229.1                |  |                    | 2.4      |  |       | 165.8    |   |  |   | 412.5    
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Total revenues                                                                       |  |                       | 1,528.2  |                 |   | 1,045.2              |  |                    | 1,321.1  |  |       | 521.7    |   |  |   | 4,416.2  
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Benefits and expenses:                                                               |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Interest credited to policyholder accounts                                           |  |                       | 589.1    |                 |   | 455.0                |  |                    | 190.7    |  |       | 146.1    |   |  |   | 1,380.9  
|Benefits and claims                                                                  |  |                       | 155.4    |                 |   |                     |  |                    | 419.5    |  |       |         |   |  |   | 574.9    
|Policyholder dividends                                                               |  |                       |         |                 |   |                     |  |                    | 107.3    |  |       |         |   |  |   | 107.3    
|Amortization of DAC                                                                  |  |                       | 329.3    |                 |   | 47.4                 |  |                    | 102.7    |  |       | 0.8      |   |  |   | 480.2    
|Amortization of VOBA                                                                 |  |                       | 7.2      |                 |   | 3.5                  |  |                    | 34.3     |  |       |         |   |  |   | 45.0     
|Interest expense                                                                     |  |                       |         |                 |   |                     |  |                    |         |  |       | 107.6    |   |  |   | 107.6    
|Debt extinguishment costs                                                            |  |                       |         |                 |   |                     |  |                    |         |  |       | 21.7     |   |  |   | 21.7     
|Other operating expenses                                                             |  |                       | 196.5    |                 |   | 348.0                |  |                    | 200.5    |  |       | 173.2    |   |  |   | 918.2    
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Total benefits and expenses                                                          |  |                       | 1,277.5  |                 |   | 853.9                |  |                    | 1,055.0  |  |       | 449.4    |   |  |   | 3,635.8  
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Income from continuing operations before federal income tax expense                  |  |                       | 250.7    |                 |   | 191.3                |  |                    | 266.1    |  |       | 72.3     |   |  | $ | 780.4    
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Less: non-operating net realized investment gains1                                   |  |                       |         |                 |   |                     |  |                    |         |  |       | (18.2    | ) |  |   |          
|Less: adjustment to amortization related to net realized investment gains and losses |  |                       |         |                 |   |                     |  |                    |         |  |       | 0.8      |   |  |   |          
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Pre-tax operating earnings                                                           |  | $                     | 250.7    |                 | $ | 191.3                |  | $                  | 266.1    |  | $     | 54.9     |   |  |   |          
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Assets as of year end                                                                |  | $                     | 53,809.7 |                 | $ | 31,678.1             |  | $                  | 19,755.6 |  | $     | 11,117.8 |   |  | $ | 116,361.2
|                                                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          



|1 | Excluding operating items (periodic net amounts paid or received on interest rate swaps that do not qualify for hedge
accounting treatment, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations).
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2007, 2006 and 2005



(22) Quarterly Results of Operations (Unaudited)



The following tables summarize the unaudited quarterly
results of operations for the years ended December 31:



|                                                                    |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|------------------------------------------------------------------- |  | ------------ | ------- | - | ------------- | - | ------- | ------------ |  | - | ------------- | - |  | - | ------- | -
|(in millions, except per share amounts)                             |  | FirstQuarter |         |   | SecondQuarter |   |         | ThirdQuarter |  |   | FourthQuarter |  
|2007                                                                |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Revenues:                                                           |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Policy charges                                                      |  | $            | 335.9   |   |               | $ | 343.1   |              |  | $ | 345.5         |   |  | $ | 359.4   |  
|Premiums                                                            |  |              | 110.4   |   |               |   | 104.9   |              |  |   | 101.7         |   |  |   | 115.7   |  
|Net investment income                                               |  |              | 589.8   |   |               |   | 577.8   |              |  |   | 547.3         |   |  |   | 561.8   |  
|Net realized investment losses                                      |  |              | (11.4   | ) |               |   | (2.6    | )            |  |   | (20.4         | ) |  |   | (130.8  | )
|Other income                                                        |  |              | 135.3   |   |               |   | 145.2   |              |  |   | 157.7         |   |  |   | 162.6   |  
|                                                                    |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Total revenues                                                      |  |              | 1,160.0 |   |               |   | 1,168.4 |              |  |   | 1,131.8       |   |  |   | 1,068.7 |  
|                                                                    |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Benefits and expenses:                                              |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Interest credited to policyholder accounts                          |  |              | 342.1   |   |               |   | 337.0   |              |  |   | 333.3         |   |  |   | 329.6   |  
|Benefits and claims                                                 |  |              | 153.6   |   |               |   | 186.1   |              |  |   | 161.4         |   |  |   | 181.8   |  
|Policyholder dividends                                              |  |              | 21.3    |   |               |   | 20.0    |              |  |   | 23.1          |   |  |   | 18.7    |  
|Amortization of DAC                                                 |  |              | 133.2   |   |               |   | 18.3    |              |  |   | 112.1         |   |  |   | 118.5   |  
|Amortization of VOBA                                                |  |              | 10.3    |   |               |   | 15.4    |              |  |   | 11.9          |   |  |   | 9.4     |  
|Interest expense                                                    |  |              | 24.5    |   |               |   | 27.5    |              |  |   | 28.9          |   |  |   | 29.7    |  
|Debt extinguishment costs                                           |  |              |        |   |               |   | 10.2    |              |  |   |              |   |  |   |        |  
|Other operating expenses                                            |  |              | 260.3   |   |               |   | 273.9   |              |  |   | 270.2         |   |  |   | 266.2   |  
|                                                                    |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Total benefits and expenses                                         |  |              | 945.3   |   |               |   | 888.4   |              |  |   | 940.9         |   |  |   | 953.9   |  
|                                                                    |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Income from continuing operations before federal income tax expense |  |              | 214.7   |   |               |   | 280.0   |              |  |   | 190.9         |   |  |   | 114.8   |  
|Federal income tax expense                                          |  |              | 45.9    |   |               |   | 80.8    |              |  |   | 44.7          |   |  |   | 19.3    |  
|                                                                    |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Income from continuing operations                                   |  |              | 168.8   |   |               |   | 199.2   |              |  |   | 146.2         |   |  |   | 95.5    |  
|Discontinued operations, net of taxes                               |  |              | 45.5    |   |               |   | (1.9    | )            |  |   | 0.8           |   |  |   | (21.3   | )
|Cumulative effect of adoption of accounting principle, net of taxes |  |              | (6.0    | ) |               |   |        |              |  |   |              |   |  |   |        |  
|                                                                    |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Net income                                                          |  | $            | 208.3   |   |               | $ | 197.3   |              |  | $ | 147.0         |   |  | $ | 74.2    |  
|                                                                    |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Earnings from continuing operations per common share:               |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Basic                                                               |  | $            | 1.16    |   |               | $ | 1.39    |              |  | $ | 1.03          |   |  | $ | 0.69    |  
|Diluted                                                             |  | $            | 1.15    |   |               | $ | 1.38    |              |  | $ | 1.02          |   |  | $ | 0.68    |  
|Earnings per common share:                                          |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Basic                                                               |  | $            | 1.43    |   |               | $ | 1.38    |              |  | $ | 1.04          |   |  | $ | 0.53    |  
|Diluted                                                             |  | $            | 1.42    |   |               | $ | 1.37    |              |  | $ | 1.03          |   |  | $ | 0.53    |  



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|                                                                    |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|------------------------------------------------------------------- |  | ------------ | ------- | - | ------------- | - | ------- | ------------ |  | - | ------------- | - |  | - | ------- | -
|(in millions, except per share amounts)                             |  | FirstQuarter |         |   | SecondQuarter |   |         | ThirdQuarter |  |   | FourthQuarter |  
|2006                                                                |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Revenues:                                                           |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Policy charges                                                      |  | $            | 321.0   |   |               | $ | 337.6   |              |  | $ | 327.6         |   |  | $ | 329.8   |  
|Premiums                                                            |  |              | 107.8   |   |               |   | 109.7   |              |  |   | 110.5         |   |  |   | 113.5   |  
|Net investment income                                               |  |              | 577.4   |   |               |   | 572.2   |              |  |   | 578.2         |   |  |   | 572.4   |  
|Net realized investment (losses) gains                              |  |              | (6.8    | ) |               |   | (9.9    | )            |  |   | 9.6           |   |  |   | 16.2    |  
|Other income                                                        |  |              | 115.4   |   |               |   | 120.1   |              |  |   | 125.4         |   |  |   | 134.8   |  
|                                                                    |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Total revenues                                                      |  |              | 1,114.8 |   |               |   | 1,129.7 |              |  |   | 1,151.3       |   |  |   | 1,166.7 |  
|                                                                    |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Benefits and expenses:                                              |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Interest credited to policyholder accounts                          |  |              | 342.1   |   |               |   | 345.7   |              |  |   | 348.2         |   |  |   | 345.5   |  
|Benefits and claims                                                 |  |              | 156.1   |   |               |   | 156.4   |              |  |   | 163.8         |   |  |   | 170.5   |  
|Policyholder dividends                                              |  |              | 20.2    |   |               |   | 24.5    |              |  |   | 24.6          |   |  |   | 21.4    |  
|Amortization of DAC                                                 |  |              | 120.6   |   |               |   | 126.0   |              |  |   | 108.2         |   |  |   | 108.1   |  
|Amortization of VOBA                                                |  |              | 11.6    |   |               |   | 12.5    |              |  |   | 14.5          |   |  |   | 7.4     |  
|Interest expense                                                    |  |              | 25.6    |   |               |   | 24.9    |              |  |   | 25.8          |   |  |   | 26.8    |  
|Other operating expenses                                            |  |              | 256.8   |   |               |   | 247.4   |              |  |   | 247.0         |   |  |   | 281.0   |  
|                                                                    |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Total benefits and expenses                                         |  |              | 933.0   |   |               |   | 937.4   |              |  |   | 932.1         |   |  |   | 960.7   |  
|                                                                    |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Income from continuing operations before federal income tax expense |  |              | 181.8   |   |               |   | 192.3   |              |  |   | 219.2         |   |  |   | 206.0   |  
|Federal income tax expense (benefit)                                |  |              | 40.3    |   |               |   | (70.5   | )            |  |   | 55.6          |   |  |   | 46.8    |  
|                                                                    |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Income from continuing operations                                   |  |              | 141.5   |   |               |   | 262.8   |              |  |   | 163.6         |   |  |   | 159.2   |  
|Discontinued operations, net of taxes                               |  |              | (0.5    | ) |               |   | (0.1    | )            |  |   | (1.7          | ) |  |   | (0.8    | )
|                                                                    |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Net income                                                          |  | $            | 141.0   |   |               | $ | 262.7   |              |  | $ | 161.9         |   |  | $ | 158.4   |  
|                                                                    |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Earnings from continuing operations per common share:               |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Basic                                                               |  | $            | 0.93    |   |               | $ | 1.76    |              |  | $ | 1.09          |   |  | $ | 1.07    |  
|Diluted                                                             |  | $            | 0.92    |   |               | $ | 1.75    |              |  | $ | 1.09          |   |  | $ | 1.06    |  
|Earnings per common share:                                          |  |              |         |   |               |   |         |              |  |   |               |   |  |   |         |  
|Basic                                                               |  | $            | 0.93    |   |               | $ | 1.76    |              |  | $ | 1.08          |   |  | $ | 1.07    |  
|Diluted                                                             |  | $            | 0.92    |   |               | $ | 1.75    |              |  | $ | 1.08          |   |  | $ | 1.06    |  



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Schedule I Consolidated Summary of InvestmentsOther Than Investments in Related Parties



As of December 31, 2007 (in millions)



|                                                                         |  |          |          |             |   |                                                     |  |   |          |  
|------------------------------------------------------------------------ |  | -------- | -------- | ----------- | - | --------------------------------------------------- |  | - | -------- | -
|Column A                                                                 |  | Column B |          | Column C    |   | Column D                                            | 
|Type of investment                                                       |  | Cost     |          | Marketvalue |   | Amount atwhich shownin theconsolidatedbalance sheet | 
|Fixed maturity securities available-for-sale:                            |  |          |          |             |   |                                                     |  |   |          |  
|Bonds:                                                                   |  |          |          |             |   |                                                     |  |   |          |  
|U.S. Treasury securities and obligations of U.S. Government corporations |  | $        | 172.8    |             | $ | 189.3                                               |  | $ | 189.3    |  
|Agencies not backed by the full faith and credit of the U.S. Government  |  |          | 418.1    |             |   | 479.6                                               |  |   | 479.6    |  
|Obligations of states and political subdivisions                         |  |          | 273.3    |             |   | 272.2                                               |  |   | 272.2    |  
|Foreign governments                                                      |  |          | 56.2     |             |   | 58.4                                                |  |   | 58.4     |  
|Public utilities                                                         |  |          | 1,549.1  |             |   | 1,567.2                                             |  |   | 1,567.2  |  
|All other corporate                                                      |  |          | 24,794.4 |             |   | 24,622.5                                            |  |   | 24,622.5 |  
|                                                                         |  |          |          |             |   |                                                     |  |   |          |  
|Total fixed maturity securities available-for-sale                       |  |          | 27,263.9 |             |   | 27,189.2                                            |  |   | 27,189.2 |  
|                                                                         |  |          |          |             |   |                                                     |  |   |          |  
|Equity securities available-for-sale:                                    |  |          |          |             |   |                                                     |  |   |          |  
|Common stocks:                                                           |  |          |          |             |   |                                                     |  |   |          |  
|Banks, trusts and insurance companies                                    |  |          | 26.8     |             |   | 31.5                                                |  |   | 31.5     |  
|Industrial, miscellaneous and all other                                  |  |          | 23.9     |             |   | 24.3                                                |  |   | 24.3     |  
|Nonredeemable preferred stocks                                           |  |          | 66.8     |             |   | 68.4                                                |  |   | 68.4     |  
|                                                                         |  |          |          |             |   |                                                     |  |   |          |  
|Total equity securities available-for-sale                               |  |          | 117.5    |             |   | 124.2                                               |  |   | 124.2    |  
|                                                                         |  |          |          |             |   |                                                     |  |   |          |  
|Trading assets                                                           |  |          | 41.7     |             |   | 37.7                                                |  |   | 37.7     |  
|Mortgage loans on real estate, net                                       |  |          | 8,314.7  |             |   |                                                     |  |   | 8,316.1  | 1
|Real estate, net:                                                        |  |          |          |             |   |                                                     |  |   |          |  
|Investment properties                                                    |  |          | 15.4     |             |   |                                                     |  |   | 11.9     | 2
|Acquired in satisfaction of debt                                         |  |          | 11.0     |             |   |                                                     |  |   | 9.9      | 2
|                                                                         |  |          |          |             |   |                                                     |  |   |          |  
|Total real estate, net                                                   |  |          | 26.4     |             |   |                                                     |  |   | 21.8     |  
|                                                                         |  |          |          |             |   |                                                     |  |   |          |  
|Policy loans                                                             |  |          | 1,018.3  |             |   |                                                     |  |   | 1,018.3  |  
|Other long-term investments                                              |  |          | 1,187.2  |             |   |                                                     |  |   | 1,187.2  |  
|Short-term investments, including amounts managed by a related party     |  |          | 1,180.6  |             |   |                                                     |  |   | 1,173.6  | 3
|                                                                         |  |          |          |             |   |                                                     |  |   |          |  
|Total investments                                                        |  | $        | 39,150.3 |             |   |                                                     |  | $ | 39,068.1 |  
|                                                                         |  |          |          |             |   |                                                     |  |   |          |  



|1 | Difference from Column B primarily is attributable to valuation allowances due to impairments on mortgage loans on
real estate (see Note 6 to the audited consolidated financial statements), hedges and commitment hedges on mortgage loans on real estate.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | Difference from Column B primarily results from adjustments for accumulated depreciation.
|- | -----------------------------------------------------------------------------------------

|3 | Difference from Column B primarily is due to unrealized gains
and/or losses from securities lending.
|- | ----------------------------------------------------------------------------------------------------



See
accompanying report of independent registered public accounting firm.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Schedule II Condensed Financial Information of Registrant (in millions)



|                                                                                                   |      |                          |       |      |              |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------- | ---- | ------------------------ | ----- | ---- | ------------ | - | ------- | - |  | - | ------- | -
|Condensed Balance Sheets                                                                           |      |                          |       |      | December 31, |  
|                                                                                                   |      |                          |       | 2007 |              |   | 2006    |  
|Assets                                                                                             |      |                          |       |      |              |   |         |   |  |   |         |  
|Investments in subsidiaries                                                                        |      |                          |       |      |              | $ | 5,818.5 |   |  | $ | 6,076.7 |  
|Securities available-for-sale, at fair value:                                                      |      |                          |       |      |              |   |         |   |  |   |         |  
|Fixed maturity securities (cost $103.3)                                                            |      |                          |       |      |              |   | 103.5   |   |  |   |        |  
|Equity securities (cost $15.1)                                                                     |      |                          |       |      |              |   | 15.5    |   |  |   |        |  
|Short-term investments, including amounts managed by a related party                               |      |                          |       |      |              |   | 29.7    |   |  |   | 161.4   |  
|Trading assets                                                                                     |      |                          |       |      |              |   | 37.7    |   |  |   | 24.3    |  
|Investment in surplus notes from a subsidiary                                                      |      |                          |       |      |              |   | 700.0   |   |  |   | 700.0   |  
|Goodwill                                                                                           |      |                          |       |      |              |   | 48.4    |   |  |   | 97.4    |  
|Other assets                                                                                       |      |                          |       |      |              |   | 151.5   |   |  |   | 29.3    |  
|                                                                                                   |      |                          |       |      |              |   |         |   |  |   |         |  
|Total assets                                                                                       |      |                          |       |      |              | $ | 6,904.8 |   |  | $ | 7,089.1 |  
|                                                                                                   |      |                          |       |      |              |   |         |   |  |   |         |  
|Liabilities and Shareholders Equity                                                               |      |                          |       |      |              |   |         |   |  |   |         |  
|Long-term debt                                                                                     |      |                          |       |      |              | $ | 1,499.8 |   |  | $ | 1,398.5 |  
|Other liabilities                                                                                  |      |                          |       |      |              |   | 80.4    |   |  |   | 67.9    |  
|                                                                                                   |      |                          |       |      |              |   |         |   |  |   |         |  
|Total liabilities                                                                                  |      |                          |       |      |              |   | 1,580.2 |   |  |   | 1,466.4 |  
|Shareholders equity                                                                               |      |                          |       |      |              |   | 5,324.6 |   |  |   | 5,622.7 |  
|                                                                                                   |      |                          |       |      |              |   |         |   |  |   |         |  
|Total liabilities and shareholders equity                                                         |      |                          |       |      |              | $ | 6,904.8 |   |  | $ | 7,089.1 |  
|                                                                                                   |      |                          |       |      |              |   |         |   |  |   |         |  
|                                                                                                   |     
|Condensed Statements of Income                                                                     |      | Years ended December 31, |      
|                                                                                                   | 2007 |                          |       | 2006 |              |   | 2005    |  
|Revenues:                                                                                          |      |                          |       |      |              |   |         |   |  |   |         |  
|Dividends received from subsidiaries                                                               |      | $                        | 789.9 |      |              | $ | 508.1   |   |  | $ | 255.0   |  
|Net investment income                                                                              |      |                          | 69.4  |      |              |   | 61.9    |   |  |   | 58.5    |  
|Net realized investment (losses) gains                                                             |      |                          | (2.1  | )    |              |   | 3.6     |   |  |   | 1.5     |  
|Other income                                                                                       |      |                          | 0.6   |      |              |   | 0.1     |   |  |   | 2.1     |  
|                                                                                                   |      |                          |       |      |              |   |         |   |  |   |         |  
|Total revenues                                                                                     |      |                          | 857.8 |      |              |   | 573.7   |   |  |   | 317.1   |  
|                                                                                                   |      |                          |       |      |              |   |         |   |  |   |         |  
|Expenses:                                                                                          |      |                          |       |      |              |   |         |   |  |   |         |  
|Interest expense                                                                                   |      |                          | 94.2  |      |              |   | 91.3    |   |  |   | 95.1    |  
|Debt extinguishment costs                                                                          |      |                          | 10.2  |      |              |   |        |   |  |   | 21.7    |  
|Other operating expenses                                                                           |      |                          | 18.4  |      |              |   | 19.2    |   |  |   | 2.5     |  
|                                                                                                   |      |                          |       |      |              |   |         |   |  |   |         |  
|Total expenses                                                                                     |      |                          | 122.8 |      |              |   | 110.5   |   |  |   | 119.3   |  
|                                                                                                   |      |                          |       |      |              |   |         |   |  |   |         |  
|Income before federal income tax benefit                                                           |      |                          | 735.0 |      |              |   | 463.2   |   |  |   | 197.8   |  
|Federal income tax benefit                                                                         |      |                          | (6.2  | )    |              |   | (10.2   | ) |  |   | (14.2   | )
|                                                                                                   |      |                          |       |      |              |   |         |   |  |   |         |  
|Income from continuing operations before equity in undistributed net (loss) income of subsidiaries |      |                          | 741.2 |      |              |   | 473.4   |   |  |   | 212.0   |  
|Equity in undistributed net (loss) income of subsidiaries                                          |      |                          | (87.0 | )    |              |   | 250.3   |   |  |   | 395.3   |  
|                                                                                                   |      |                          |       |      |              |   |         |   |  |   |         |  
|Income from continuing operations                                                                  |      |                          | 654.2 |      |              |   | 723.7   |   |  |   | 607.3   |  
|Discontinued operations, net of taxes                                                              |      |                          | (27.4 | )    |              |   | 0.3     |   |  |   | 3.1     |  
|                                                                                                   |      |                          |       |      |              |   |         |   |  |   |         |  
|Net income                                                                                         |      | $                        | 626.8 |      |              | $ | 724.0   |   |  | $ | 610.4   |  
|                                                                                                   |      |                          |       |      |              |   |         |   |  |   |         |  



See accompanying notes
to condensed financial statements and report of independent registered public accounting firm.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Schedule II Condensed Financial Information of Registrant, Continued



|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                  |  | Years ended December 31, |       
|Condensed Statements of Cash Flows (in millions)                                  |  | 2007                     |        |   | 2006 |   |        | 2005 | 
|Cash flows from operating activities:                                             |  |                          |        |   |      |   |        |      |  |   |        |  
|Net income                                                                        |  | $                        | 626.8  |   |      | $ | 724.0  |      |  | $ | 610.4  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |        |   |      |   |        |      |  |   |        |  
|Net realized investment losses (gains)                                            |  |                          | 2.1    |   |      |   | (3.6   | )    |  |   | (1.5   | )
|Equity in undistributed net loss (income) of subsidiaries                         |  |                          | 87.0   |   |      |   | (250.3 | )    |  |   | (395.3 | )
|Other, net                                                                        |  |                          | (66.4  | ) |      |   | 20.1   |      |  |   | (27.0  | )
|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|Net cash provided by operating activities                                         |  |                          | 649.5  |   |      |   | 490.2  |      |  |   | 186.6  |  
|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash flows from investing activities:                                             |  |                          |        |   |      |   |        |      |  |   |        |  
|Proceeds from maturity of securities available-for-sale                           |  |                          | 30.6   |   |      |   |       |      |  |   |       |  
|Cost of securities available-for-sale acquired                                    |  |                          | (148.9 | ) |      |   |       |      |  |   |       |  
|Net decrease (increase) in short-term investments                                 |  |                          | 131.7  |   |      |   | 4.7    |      |  |   | (87.3  | )
|Capital contributed to subsidiaries                                               |  |                          |       |   |      |   | (50.0  | )    |  |   |       |  
|Subsidiary mergers and acquisitions                                               |  |                          | (319.2 | ) |      |   |       |      |  |   | (14.1  | )
|Subsidiary sale                                                                   |  |                          | 115.4  |   |      |   |       |      |  |   | 59.2   |  
|Other, net                                                                        |  |                          | (0.8   | ) |      |   | 8.7    |      |  |   | (17.1  | )
|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|Net cash used in investing activities                                             |  |                          | (191.2 | ) |      |   | (36.6  | )    |  |   | (59.3  | )
|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash flows from financing activities:                                             |  |                          |        |   |      |   |        |      |  |   |        |  
|Net proceeds from issuance of long-term debt                                      |  |                          | 395.4  |   |      |   |       |      |  |   | 199.4  |  
|Principal payments on long-term debt                                              |  |                          | (300.0 | ) |      |   |       |      |  |   | (206.2 | )
|Cash dividends paid                                                               |  |                          | (186.9 | ) |      |   | (132.7 | )    |  |   | (114.8 | )
|Common shares repurchased under announced program                                 |  |                          | (502.4 | ) |      |   | (416.8 | )    |  |   | (49.0  | )
|Other, net                                                                        |  |                          | 135.6  |   |      |   | 96.2   |      |  |   | 41.7   |  
|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|Net cash used in financing activities                                             |  |                          | (458.3 | ) |      |   | (453.3 | )    |  |   | (128.9 | )
|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|Net increase (decrease) in cash                                                   |  |                          |       |   |      |   | 0.3    |      |  |   | (1.6   | )
|Cash, beginning of year                                                           |  |                          | 0.3    |   |      |   |       |      |  |   | 1.6    |  
|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash, end of year                                                                 |  | $                        | 0.3    |   |      | $ | 0.3    |      |  | $ |       |  
|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  



See accompanying notes
to condensed financial statements and report of independent registered public accounting firm.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Schedule II Condensed Financial Information of Registrant, Continued



Notes to Condensed Financial Statements



(1) Organization and Presentation



NFS is the holding company for NLIC and other companies that
comprise the domestic life insurance and retirement savings operations of the Nationwide group of companies, including NFN.



(2) Long-term Debt and Guarantees



The following table summarizes long-term debt as of December 31:



|                                                                                                             |  |      |         |      |   |        
|------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|(in millions)                                                                                                |  | 2007 |         | 2006
|$300.0 million principal, 8.00% senior notes, due March 1, 2027                                              |  | $    |        |      | $ | 298.6  
|$300.0 million principal, 6.25% senior notes, due November 15, 2011                                          |  |      | 299.2   |      |   | 299.2  
|$300.0 million principal, 5.90% senior notes, due July 1, 2012                                               |  |      | 299.3   |      |   | 299.0  
|$200.0 million principal, 5.625% senior notes, due February 13, 2015                                         |  |      | 199.3   |      |   | 199.2  
|$200.0 million principal, 5.10% senior notes, due October 1, 2015                                            |  |      | 199.5   |      |   | 199.4  
|$400.0 million principal, 6.75% fixed-to-floating rate junior subordinated notes, due May 15, 2037           |  |      | 399.4   |      |   |       
|$100.0 million principal, 7.899% junior subordinated debentures issued to a related party, due March 1, 2037 |  |      | 103.1   |      |   | 103.1  
|                                                                                                             |  |      |         |      |   |        
|Total long-term debt                                                                                         |  | $    | 1,499.8 |      | $ | 1,398.5
|                                                                                                             |  |      |         |      |   |        



See
Note 12 to the audited consolidated financial statements of the Company included earlier in this report for a complete description of the components of long-term debt and disclosure of distributions classified as interest expense.



(3) Related Party Transactions



NLIC made interest payments to NFS on surplus notes totaling
$53.7 million in 2007, 2006 and 2005. Payments of interest and principal under the notes require the prior approval of the ODI.



See Note 2(o) and Note 17 to the audited consolidated financial statements of the Company included earlier in this report for a
description of other related party transactions.



See
accompanying report of independent registered public accounting firm.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Schedule III Supplementary Insurance Information



As of
December 31, 2007, 2006 and 2005 and for each of the years then ended (in millions)



|                       |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      
|---------------------- |  | ------------------------------ | ------- | ---------------------------------------------------- | - | ---------------------------------------------- |  | - | -------------------------------------- | - | --------------- | - | ------- |  | - | -----
|Column A               |  | Column B                       |         | Column C                                             |   | Column D                                       |  |   | Column E                               |   | Column F       
|Year: Segment          |  | Deferredpolicyacquisitioncosts |         | Future policybenefits,losses, claimsand lossexpenses |   | Unearnedpremiums1                              |  |   | Other policyclaims andbenefitspayable1 |   | Premiumrevenue 
|2007                   |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      
|Individual Investments |  | $                              | 2,078.0 |                                                      | $ | 11,316.4                                       |  |   |                                        |   |                 |   |         |  | $ | 133.3
|Retirement Plans       |  |                                | 292.9   |                                                      |   | 10,973.1                                       |  |   |                                        |   |                 |   |         |  |   |     
|Individual Protection  |  |                                | 1,637.6 |                                                      |   | 8,192.4                                        |  |   |                                        |   |                 |   |         |  |   | 299.4
|Corporate and Other    |  |                                | 87.1    |                                                      |   | 4,959.6                                        |  |   |                                        |   |                 |   |         |  |   |     
|                       |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      
|Total                  |  | $                              | 4,095.6 |                                                      | $ | 35,441.5                                       |  |   |                                        |   |                 |   |         |  | $ | 432.7
|                       |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      
|2006                   |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      
|Individual Investments |  | $                              | 1,945.0 |                                                      | $ | 13,753.4                                       |  |   |                                        |   |                 |   |         |  | $ | 142.5
|Retirement Plans       |  |                                | 292.1   |                                                      |   | 11,163.2                                       |  |   |                                        |   |                 |   |         |  |   |     
|Individual Protection  |  |                                | 1,530.5 |                                                      |   | 8,148.8                                        |  |   |                                        |   |                 |   |         |  |   | 299.0
|Corporate and Other    |  |                                | 83.4    |                                                      |   | 5,032.4                                        |  |   |                                        |   |                 |   |         |  |   |     
|                       |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      
|Total                  |  | $                              | 3,851.0 |                                                      | $ | 38,097.8                                       |  |   |                                        |   |                 |   |         |  | $ | 441.5
|                       |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      
|2005                   |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      
|Individual Investments |  | $                              | 1,936.4 |                                                      | $ | 15,815.0                                       |  |   |                                        |   |                 |   |         |  | $ | 102.9
|Retirement Plans       |  |                                | 294.5   |                                                      |   | 11,264.6                                       |  |   |                                        |   |                 |   |         |  |   |     
|Individual Protection  |  |                                | 1,412.0 |                                                      |   | 8,049.0                                        |  |   |                                        |   |                 |   |         |  |   | 297.0
|Corporate and Other    |  |                                | 42.5    |                                                      |   | 4,619.5                                        |  |   |                                        |   |                 |   |         |  |   |     
|                       |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      
|Total                  |  | $                              | 3,685.4 |                                                      | $ | 39,748.1                                       |  |   |                                        |   |                 |   |         |  | $ | 399.9
|                       |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      
|                       |  |                                |         |                                                      |  
|Column A               |  | Column G                       |         | Column H                                             |   | Column I                                       |  |   | Column J                               |   | Column K       
|Year: Segment          |  | Netinvestmentincome2           |         | Benefits,claims, lossesand settlementexpenses        |   | Amortization ofdeferredpolicy acquisitioncosts |  |   | Otheroperatingexpenses2                |   | Premiumswritten
|2007                   |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      
|Individual Investments |  | $                              | 642.9   |                                                      | $ | 677.8                                          |  | $ | 287.1                                  |   |                 | $ | 204.2   |  |   |      
|Retirement Plans       |  |                                | 655.2   |                                                      |   | 443.3                                          |  |   | 27.4                                   |   |                 |   | 422.9   |  |   |      
|Individual Protection  |  |                                | 472.3   |                                                      |   | 724.5                                          |  |   | 93.1                                   |   |                 |   | 232.3   |  |   |      
|Corporate and Other    |  |                                | 506.3   |                                                      |   | 262.4                                          |  |   | (25.5                                  | ) |                 |   | 379.0   |  |   |      
|                       |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      
|Total                  |  | $                              | 2,276.7 |                                                      | $ | 2,108.0                                        |  | $ | 382.1                                  |   |                 | $ | 1,238.4 |  |   |      
|                       |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      
|2006                   |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      
|Individual Investments |  | $                              | 781.1   |                                                      | $ | 730.7                                          |  | $ | 352.7                                  |   |                 | $ | 220.1   |  |   |      
|Retirement Plans       |  |                                | 652.2   |                                                      |   | 451.6                                          |  |   | 38.3                                   |   |                 |   | 404.5   |  |   |      
|Individual Protection  |  |                                | 468.1   |                                                      |   | 726.8                                          |  |   | 81.6                                   |   |                 |   | 231.8   |  |   |      
|Corporate and Other    |  |                                | 398.8   |                                                      |   | 209.9                                          |  |   | (9.7                                   | ) |                 |   | 324.9   |  |   |      
|                       |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      
|Total                  |  | $                              | 2,300.2 |                                                      | $ | 2,119.0                                        |  | $ | 462.9                                  |   |                 | $ | 1,181.3 |  |   |      
|                       |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      
|2005                   |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      
|Individual Investments |  | $                              | 869.9   |                                                      | $ | 744.5                                          |  | $ | 329.3                                  |   |                 | $ | 203.7   |  |   |      
|Retirement Plans       |  |                                | 661.4   |                                                      |   | 455.0                                          |  |   | 47.4                                   |   |                 |   | 351.5   |  |   |      
|Individual Protection  |  |                                | 475.1   |                                                      |   | 717.5                                          |  |   | 102.7                                  |   |                 |   | 234.8   |  |   |      
|Corporate and Other    |  |                                | 337.7   |                                                      |   | 146.1                                          |  |   | 0.8                                    |   |                 |   | 302.5   |  |   |      
|                       |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      
|Total                  |  | $                              | 2,344.1 |                                                      | $ | 2,063.1                                        |  | $ | 480.2                                  |   |                 | $ | 1,092.5 |  |   |      
|                       |  |                                |         |                                                      |   |                                                |  |   |                                        |   |                 |   |         |  |   |      



|1 | Unearned premiums and other policy claims and benefits payable are included in Column C amounts.
|- | ------------------------------------------------------------------------------------------------

|2 | Allocations of net investment income and certain operating expenses are based on numerous assumptions and estimates,
and reported segment operating results would change if different methods were applied.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying report of independent registered public accounting firm.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Schedule IV Reinsurance



As of December 31, 2007, 2006
and 2005 and for each of the years then ended (dollars in millions)



|                              |  |             |           |                        |   |                           |  |           |       |                                  |   |           |  |     |  
|----------------------------- |  | ----------- | --------- | ---------------------- | - | ------------------------- |  | --------- | ----- | -------------------------------- | - | --------- |  | --- | -
|Column A                      |  | Column B    |           | Column C               |   | Column D                  |  | Column E  |       | Column F                         |  
|                              |  | Grossamount |           | Ceded toothercompanies |   | Assumedfromothercompanies |  | Netamount |       | Percentageof amountassumedto net |  
|2007                          |  |             |           |                        |   |                           |  |           |       |                                  |   |           |  |     |  
|Life insurance in force       |  | $           | 213,683.5 |                        | $ | 76,178.6                  |  | $         | 14.0  |                                  | $ | 137,518.9 |  | 0.0 | %
|                              |  |             |           |                        |   |                           |  |           |       |                                  |   |           |  |     |  
|Premiums:                     |  |             |           |                        |   |                           |  |           |       |                                  |   |           |  |     |  
|Life insurance1               |  | $           | 523.3     |                        | $ | 92.5                      |  | $         | 1.9   |                                  | $ | 432.7     |  | 0.4 | %
|Accident and health insurance |  |             | 289.2     |                        |   | 316.8                     |  |           | 27.6  |                                  |   |          |  | NM  |  
|                              |  |             |           |                        |   |                           |  |           |       |                                  |   |           |  |     |  
|Total                         |  | $           | 812.5     |                        | $ | 409.3                     |  | $         | 29.5  |                                  | $ | 432.7     |  | 6.8 | %
|                              |  |             |           |                        |   |                           |  |           |       |                                  |   |           |  |     |  
|2006                          |  |             |           |                        |   |                           |  |           |       |                                  |   |           |  |     |  
|Life insurance in force       |  | $           | 209,941.7 |                        | $ | 76,648.6                  |  | $         | 19.6  |                                  | $ | 133,312.7 |  | 0.0 | %
|                              |  |             |           |                        |   |                           |  |           |       |                                  |   |           |  |     |  
|Premiums:                     |  |             |           |                        |   |                           |  |           |       |                                  |   |           |  |     |  
|Life insurance1               |  | $           | 490.8     |                        | $ | 51.1                      |  | $         | 1.8   |                                  | $ | 441.5     |  | 0.4 | %
|Accident and health insurance |  |             | 388.9     |                        |   | 417.4                     |  |           | 28.5  |                                  |   |          |  | NM  |  
|                              |  |             |           |                        |   |                           |  |           |       |                                  |   |           |  |     |  
|Total                         |  | $           | 879.7     |                        | $ | 468.5                     |  | $         | 30.3  |                                  | $ | 441.5     |  | 6.9 | %
|                              |  |             |           |                        |   |                           |  |           |       |                                  |   |           |  |     |  
|2005                          |  |             |           |                        |   |                           |  |           |       |                                  |   |           |  |     |  
|Life insurance in force       |  | $           | 197,781.9 |                        | $ | 71,895.0                  |  | $         | 474.2 |                                  | $ | 126,361.1 |  | 0.4 | %
|                              |  |             |           |                        |   |                           |  |           |       |                                  |   |           |  |     |  
|Premiums:                     |  |             |           |                        |   |                           |  |           |       |                                  |   |           |  |     |  
|Life insurance1               |  | $           | 468.5     |                        | $ | 69.6                      |  | $         | 1.0   |                                  | $ | 399.9     |  | 0.2 | %
|Accident and health insurance |  |             | 415.2     |                        |   | 445.1                     |  |           | 29.9  |                                  |   |          |  | NM  |  
|                              |  |             |           |                        |   |                           |  |           |       |                                  |   |           |  |     |  
|Total                         |  | $           | 883.7     |                        | $ | 514.7                     |  | $         | 30.9  |                                  |   | 399.9     |  | 7.7 | %
|                              |  |             |           |                        |   |                           |  |           |       |                                  |   |           |  |     |  



|1 | Primarily represents premiums from traditional life insurance and life-contingent immediate annuities and excludes
deposits on investment and universal life insurance products.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying report of independent registered public accounting firm.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Schedule V Valuation and Qualifying Accounts



Years ended
December 31, 2007, 2006 and 2005 (in millions)



|                                                   |  |                              |      |                                       |   |                         |  |             |   |                        |   |      |  |   |     
|-------------------------------------------------- |  | ---------------------------- | ---- | ------------------------------------- | - | ----------------------- |  | ----------- | - | ---------------------- | - | ---- |  | - | ----
|Column A                                           |  | Column B                     |      | Column C                              |   | Column D                |  | Column E   
|Description                                        |  | Balance atbeginningof period |      | Charged(credited) tocosts andexpenses |   | Chargedto otheraccounts |  | Deductions1 |   | Balance atend ofperiod
|2007                                               |  |                              |      |                                       |   |                         |  |             |   |                        |   |      |  |   |     
|Valuation allowancesmortgage loans on real estate |  | $                            | 36.0 |                                       | $ | 1.1                     |  | $           |  |                        | $ | 12.3 |  | $ | 24.8
|                                                   |  |                              |      |                                       |  
|2006                                               |  |                              |      |                                       |   |                         |  |             |   |                        |   |      |  |   |     
|Valuation allowancesmortgage loans on real estate |  | $                            | 35.1 |                                       | $ | 5.8                     |  | $           |  |                        | $ | 4.9  |  | $ | 36.0
|                                                   |  |                              |      |                                       |  
|2005                                               |  |                              |      |                                       |   |                         |  |             |   |                        |   |      |  |   |     
|Valuation allowancesmortgage loans on real estate |  | $                            | 36.9 |                                       | $ | 2.5                     |  | $           |  |                        | $ | 4.3  |  | $ | 35.1
|                                                   |  |                              |      |                                       |   |                         |  |             |   |                        |   |      |  |   |     



|1 | Amounts represent transfers to real estate owned and recoveries.
|- | ----------------------------------------------------------------



See accompanying report of independent registered public accounting firm.



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                        |  |                                         |  |                                    
|----------------------- |  | --------------------------------------- |  | -----------------------------------
|                        |  |                                         |  | NATIONWIDE FINANCIAL SERVICES, INC.
|                        |  |                                         |  | (Registrant)                       
|                        |  |                                        
|Date: February 29, 2008 |  | By                                      |  | /s/    W.G.
JURGENSEN              
|                        |  | W.G. Jurgensen, Chief Executive Officer



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                                        |  |                   |  |                                                                     |  |                  
|------------------------------------------------------- |  | ----------------- |  | ------------------------------------------------------------------- |  | -----------------
|/s/    ARDEN L.
SHISLER                                 |  | February 20, 2008 |  | /s/    W.G.
JURGENSEN                                               |  | February 29, 2008
|Arden L. Shisler, Chairman of the Board                 |  | Date              |  | W.G. Jurgensen, Chief Executive Officer and Director                |  | Date             
|                                                        |  |                  
|                                                        |  |                   | 
|/s/    JOSEPH A.
ALUTTO                                 |  | February 20, 2008 |  | /s/    JAMES G. BROCKSMITH, JR.                                     |  | February 20, 2008
|Joseph A. Alutto, Director                              |  | Date              |  | James G. Brocksmith, Jr., Director                                  |  | Date             
|                                                        |  |                   | 
|/s/    KEITH W.
ECKEL                                   |  | February 20, 2008 |  | /s/    LYDIA M.
MARSHALL                                            |  | February 20, 2008
|Keith W. Eckel, Director                                |  | Date              |  | Lydia M. Marshall, Director                                         |  | Date             
|                                                        |  |                   | 
|/s/    DONALD L.
MCWHORTER                              |  | February 20, 2008 |  | /s/    DAVID O.
MILLER                                              |  | February 20, 2008
|Donald L. McWhorter, Director                           |  | Date              |  | David O. Miller, Director                                           |  | Date             
|                                                        |  |                   | 
|/s/    MARTHA MILLER DE
LOMBERA                         |  | February 20, 2008 |  | /s/    JAMES F.
PATTERSON                                           |  | February 20, 2008
|Martha Miller de Lombera, Director                      |  | Date              |  | James F. Patterson, Director                                        |  | Date             
|                                                        |  |                   | 
|/s/    GERALD D.
PROTHRO                                |  | February 20, 2008 |  | /s/    ALEX
SHUMATE                                                 |  | February 20, 2008
|Gerald D. Prothro, Director                             |  | Date              |  | Alex Shumate, Director                                              |  | Date             
|                                                        |  |                   | 
|/s/    MARK R.
THRESHER                                 |  | February 29, 2008 |  | /s/    TIMOTHY G.
FROMMEYER                                         |  | February 29, 2008
|Mark R. Thresher, President and Chief Operating Officer |  | Date              |  | Timothy G. Frommeyer, Senior Vice PresidentChief Financial Officer |  | Date             



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##### Table of Contents

Exhibit Index



|        |  |                                                                                                                                                                                                                                                                                                                                                                                    
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                    
|3.1     |  | Form of Restated Certificate of Incorporation of Nationwide Financial Services, Inc. (previously filed as Exhibit 3.1 to Form S-1/A, Registration Number 333-18527, filed
February 10, 1997, and incorporated herein by reference)                                                                                                                                                 
|        | 
|3.2     |  | Amended and Restated Bylaws of Nationwide Financial Services, Inc. (previously filed as Exhibit 3.2 to Form 10-K, Commission File Number 1-12785, filed March 1, 2007, and
incorporated herein by reference)                                                                                                                                                                       
|        | 
|4.1     |  | Form of Indenture relating to the 8.00% senior notes, including the form of Global Note and the form of Definitive Note (previously filed as Exhibit 4.1 to Form S-1/A,
Registration Number 333-18531, filed February 25, 1997, and incorporated herein by reference)                                                                                                              
|        | 
|4.2     |  | Form of Indenture relating to the Junior Subordinated Deferrable Interest Debentures due 2037 of Nationwide Financial Services, Inc. (previously filed as Exhibit 4.1 to
Form S-1, Registration Number 333-18533, filed March 5, 1997, and incorporated herein by reference)                                                                                                       
|        | 
|4.3     |  | Senior Indenture dated November 1, 2001 relating to senior notes (previously filed as Exhibit 4.1 to Form 8-K, Commission File Number 333-18527, filed November 16, 2001,
and incorporated herein by reference)                                                                                                                                                                    
|        | 
|4.4     |  | Form of First Supplemental Indenture relating to the 6.25% senior notes (previously filed as Exhibit 4.2 to Form 8-K, Commission File Number 333-18527, filed November 16,
2001, and incorporated herein by reference)                                                                                                                                                             
|        | 
|4.5     |  | Second Supplemental Indenture relating to the 5.90% senior notes (previously filed as Exhibit 4.1 to Form 8-K, Commission File Number 333-18527, filed June 24, 2002, and
incorporated herein by reference)                                                                                                                                                                        
|        | 
|4.6     |  | Third Supplemental Indenture relating to the 5.625% senior notes (previously filed as Exhibit 4.1 to Form 8-K, Commission File Number 1-12785, filed February 13, 2003, and
incorporated herein by reference)                                                                                                                                                                      
|        | 
|4.7     |  | Fourth Supplemental Indenture relating to the 5.10% senior notes (previously filed as Exhibit 4.1 to Form 8-K, Commission File Number 1-12785, filed September 23, 2005,
and incorporated herein by reference)                                                                                                                                                                     
|        | 
|4.8     |  | Junior Subordinated Debt Indenture dated as of May 18, 2007 between Nationwide Financial Services, Inc. and Wilmington Trust Company (previously filed as Exhibit 4.1 to
Form 8-K, Commission File Number 1-12785, filed March 18, 2007, and incorporated herein by reference)                                                                                                     
|        | 
|4.9     |  | First Supplemental Indenture dated as of May 18, 2007 to the Junior Subordinated Debt Indenture between Nationwide Financial Services, Inc. and Wilmington Trust Company
(previously filed as Exhibit 4.2 to Form 8-K, Commission File Number 1-12785, filed March 18, 2007, and incorporated herein by reference)                                                                 
|        | 
|10.1    |  | Form of Intercompany Agreement among Nationwide Mutual Insurance Company, Nationwide Corporation and Nationwide Financial Services, Inc. (previously filed as Exhibit 10.1
to Form S-1/A, Registration Number 333-18533, filed March 5, 1997, and incorporated herein by reference)                                                                                                
|        | 
|10.1.1  |  | Form of Amendment No. 1 to the Intercompany Agreement among Nationwide Mutual Insurance Company, Nationwide Corporation and Nationwide Financial Services, Inc. (previously
filed as Exhibit 10.1.1 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)                                                                       
|        | 
|10.2    |  | Tax Sharing Agreement dated as of January 1, 2008 among Nationwide Financial Services, Inc. and any company that in the future becomes a subsidiary of Nationwide Financial
Services, Inc. if eligible under the Internal Revenue Code (previously filed as Exhibit 99.1 to Form 8-K, Commission File Number 1-12785, filed January 29, 2008, and incorporated herein by reference)



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##### Table of Contents

|        |  |                                                                                                                                                                                                                                                                                                                                                                
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                
|10.3    |  | Form of Tax Sharing Agreement dated as of October 1, 2002 among Nationwide Life Insurance Company and any corporation that may hereafter be a subsidiary of Nationwide Life
Insurance Company (previously filed as Exhibit 10.4 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)                      
|        | 
|10.4    |  | Form of Tax Sharing Agreement dated as of October 1, 2002 among Nationwide Life Insurance Company of America and any corporation that may hereafter be a subsidiary of
Nationwide Life Insurance Company of America (previously filed as Exhibit 10.5 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)
|        | 
|10.5    |  | Form of Tax Sharing Agreement dated as of October 1, 2002 among Nationwide Provident Holding Company and any corporation that may hereafter be a subsidiary of Nationwide
Provident Holding Company (previously filed as Exhibit 10.2 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)                
|        | 
|10.6    |  | Form of Amended and Restated Cost Sharing Agreement among parties named therein (previously filed as Exhibit 10.3 to Form 10-K, Commission File Number 1-12785, filed March
14, 2003, and incorporated herein by reference)                                                                                                                                    
|        | 
|10.7    |  | Amended and Restated Five Year Credit Agreement, dated December 31, 2007, among Nationwide Financial Services, Inc., Nationwide Life Insurance Company, Nationwide Mutual
Insurance Company, the banks party thereto and Wachovia Bank, National Association, as syndication agent and Citicorp USA, Inc., as agent                                            
|        | 
|10.8    |  | Form of Lease Agreement between Nationwide Mutual Insurance Company, Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company and Nationwide
Financial Services, Inc. (previously filed as Exhibit 10.7 to Form S-1/A, Registration Number 333-18531, filed February 25, 1997, and incorporated herein by reference)                   
|        | 
|10.9*   |  | Form of Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan (previously filed as Exhibit 10.4 to Form 10-Q, Commission
File Number 1-12785, filed August 6, 2004, and incorporated herein by reference)                                                                                                     
|        | 
|10.10*  |  | General Description of Nationwide Performance Incentive Plan (previously filed as Exhibit 10.9 to Form 10-K, Commission File Number 333-18527, filed March 29, 2001, and
incorporated herein by reference)                                                                                                                                                     
|        | 
|10.11*  |  | Form of Amended and Restated Nationwide Office of Investments Incentive Plan dated as of October 7, 2003 (previously filed as Exhibit 10.13 to Form 10-K, Commission
File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)                                                                                                           
|        | 
|10.12*  |  | Nationwide Excess Benefit Plan effective as of January 1, 2000 (previously filed as Exhibit 10.14 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and
incorporated herein by reference)                                                                                                                                                     
|        | 
|10.13*  |  | Nationwide Supplemental Retirement Plan As Amended and Restated effective January 1, 2005 (previously filed as Exhibit 10.1 to Form 10-K, Commission File Number 1-12785,
filed March 1, 2005, and incorporated herein by reference)                                                                                                                           
|        | 
|10.14*  |  | Nationwide Severance Pay Plan effective as of March 1, 2003 (previously filed as Exhibit 10.16 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and
incorporated herein by reference)                                                                                                                                                        
|        | 
|10.15*  |  | Nationwide Supplemental Defined Contribution Plan effective as of January 1, 2005 (previously filed as Exhibit 10.17 to Form 10-K, Commission File Number 1-12785, filed
March 1, 2005, and incorporated herein by reference)                                                                                                                                  



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##### Table of Contents

|         |  |                                                                                                                                                                                                                                                                                                                                                          
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                                                                                                                                                                                          
|10.16*   |  | Nationwide Individual Deferred Compensation Plan, as Amended and Restated, effective as of January 1, 2005 (previously filed as Exhibit 10.18 to Form 10-K, Commission File
Number 1-12785, filed March 1, 2005, and incorporated herein by reference)                                                                                                   
|         | 
|10.17*   |  | Nationwide Board of Directors Deferred Compensation Plan, as Amended and Restated, effective as of January 1, 2005 (previously filed as Exhibit 10.19 to Form 10-K,
Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)                                                                                           
|         | 
|10.18*   |  | Nationwide Financial Services, Inc. Second Amended and Restated Stock Retainer Plan for Non-Employee Directors (previously filed as Exhibit 10.19 to Form 10-K, Commission
File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)                                                                                               
|         | 
|10.19    |  | Investment Agency Cost Allocation Agreement dated October 30, 2002 between Nationwide Financial Services, Inc. and Nationwide Cash Management Company (previously filed as
Exhibit 10.21 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)                                                       
|         | 
|10.20    |  | Investment Agency Cost Allocation Agreement dated October 30, 2002 between Nationwide Life Insurance Company and Nationwide Cash Management Company (previously filed as
Exhibit 10.22 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)                                                         
|         | 
|10.21    |  | Investment Agency Cost Allocation Agreement dated October 30, 2002 between Nationwide Life and Annuity Insurance Company and Nationwide Cash Management Company (previously
filed as Exhibit 10.23 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)                                             
|         | 
|10.22    |  | Master Repurchase Agreement between Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company, and Nationwide Mutual Insurance Company and certain
of its Subsidiaries and affiliates (previously filed as Exhibit 10.20 to Form 10-K, Commission File Number 1-12785, filed March 29, 2000, and incorporated herein by reference)
|         | 
|10.23    |  | Stock Purchase and Sale Agreement between Nationwide Corporation and Nationwide Financial Services, Inc. (previously filed as Exhibit 10.21 to Form 10-K, Commission File
Number 1-12785, filed March 29, 2000, and incorporated herein by reference)                                                                                                    
|         | 
|10.24    |  | Stock Purchase and Sale Agreement between Nationwide Financial Services, Inc. and Nationwide Mutual Insurance Company (previously filed as Exhibit 10.22 to Form 10-K,
Commission File Number 333-18527, filed March 29, 2000, and incorporated herein by reference)                                                                                     
|         | 
|10.25    |  | Form of Employee Leasing Agreement, dated July 1, 2000, between Nationwide Mutual Insurance Company and Nationwide Financial Services, Inc. (previously filed as Exhibit
10.35 to Form 10-Q, Commission File Number 333-18527, filed May 11, 2001, and incorporated herein by reference)                                                                 
|         | 
|10.26*   |  | Nationwide Financial Services, Inc. Senior Executive Incentive Plan (previously filed as Exhibit 10.37 to Form 10-Q, Commission File Number 1-12785, filed August 10, 2001,
and incorporated herein by reference)                                                                                                                                        
|         | 
|10.26.1* |  | First Amendment to the Nationwide Financial Services, Inc. Senior Executive Incentive Plan (previously filed as Exhibit 10.6 to Form 10-Q, Commission File Number 1-12785,
filed August 6, 2004, and incorporated herein by reference)                                                                                                                   
|         | 
|10.27    |  | Fund Participation Agreement between Nationwide Financial Services, Inc., Gartmore Mutual Fund Capital Trust and Gartmore Distribution Services, Inc. dated as of May 2,
2005 (previously filed as Exhibit 10.38 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)                                



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##### Table of Contents

|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.28    |  | Fund Agreement between Nationwide Financial Services, Inc., Gartmore Mutual Fund Capital Trust, Gartmore Mutual Funds, Gartmore Morley Capital Management, Inc. and
Gartmore Distribution Services, Inc. dated as of October 1, 2002 (previously filed as Exhibit 10.39 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)                                          
|         | 
|10.28.1  |  | Amendment No. 1 dated August 1, 2005 to Fund Agreement between Nationwide Financial Services, Inc., Gartmore Mutual Fund Capital Trust, Gartmore Mutual Funds, Gartmore
Morley Capital Management, Inc. and Gartmore Distribution Services, Inc. dated as of October 1, 2002 (previously filed as Exhibit 10.39.1 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by
reference)
|         | 
|10.29    |  | Letter of Agreement between Nationwide Financial Services, Inc. and Gartmore Mutual Fund Capital Trust dated as of December 21, 2005 (previously filed as Exhibit 10.40 to
Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)                                                                                                                                          
|         | 
|10.30*   |  | Form of Deferred Stock Unit Agreement (Cash Settlement) for the Second Amended and Restated Nationwide Financial Services, Inc. Stock Retainer Plan for Non-Employee
Directors (previously filed as Exhibit 10.44 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)                                                                                                
|         | 
|10.30.1* |  | Form of Deferred Stock Unit Agreement (Share Settlement) for the Second Amended and Restated Nationwide Financial Services, Inc. Stock Retainer Plan for Non-Employee
Directors (previously filed as Exhibit 10.44.1 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)                                                                                             
|         | 
|10.31*   |  | Employment letter agreement between Nationwide Financial Services, Inc. and John Carter dated October 27, 2005 (previously filed as Exhibit 10.1 to Form 10-Q, Commission
File Number 1-12785, filed November 3, 2005, and incorporated herein by reference)                                                                                                                                                              
|         | 
|10.32*   |  | Summary of terms of employment of Timothy G. Frommeyer (previously filed as Exhibit 10.2 to Form 10-Q, Commission File Number 1-12785, filed November 3, 2005, and
incorporated herein by reference)                                                                                                                                                                                                                      
|         | 
|10.33*   |  | Summary of Non-Employee Director Compensation                                                                                                                                                                                                                                                                                                                                                                             
|         | 
|10.34    |  | Form of Software License Agreement (previously filed as Exhibit 10.4 to Form 10-Q, Commission File Number 1-12785, filed August 4, 2005, and incorporated herein by
reference)                                                                                                                                                                                                                                            
|         | 
|10.35*   |  | Employment Offer Letter Agreement between Nationwide Financial Services, Inc. and Gail Snyder dated November 28, 2005 (previously filed as Exhibit 10.49 to Form 10-K,
Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)                                                                                                                                                         
|         | 
|10.36    |  | Purchase Agreement between Nationwide Financial Services, Inc. and UBS AG, London Branch, dated March 30, 2006 (previously filed as Exhibit 10.1 to Form 10-Q, Commission
File Number 1-12785, filed May 5, 2006, and incorporated herein by reference)                                                                                                                                                                   
|         | 
|10.37*   |  | Form of NVA Target Award Opportunity and Stock Option Award for Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan
(previously filed as Exhibit 10.2 to Form 10-Q, Commission File Number 1-12785, filed May 5, 2006, and incorporated herein by reference)                                                                                                           
|         | 
|10.38*   |  | Form of NVA Target Award Opportunity for Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan (previously filed as
Exhibit 10.3 to Form 10-Q, Commission File Number 1-12785, filed May 5, 2006, and incorporated herein by reference)                                                                                                                                  



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##### Table of Contents

|        |  |                                                                                                                                                                                                                                                                                               
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                               
|10.39   |  | Agreement and Plan of Merger between Nationwide Federal Credit Union, Nationwide Bank and Nationwide Financial Services, Inc., dated June 16, 2006 (previously filed
as Exhibit 10.1 to Form 10-Q, Commission File Number 1-12785, filed August 3, 2006, and incorporated herein by reference)
|        | 
|10.40*  |  | Offer Letter for Anne L. Arvia, dated June 30, 2006 (previously filed as Exhibit 10.2 to Form 10-Q, Commission File Number 1-12785, filed August 3, 2006, and incorporated
herein by reference)                                                                                               
|        | 
|10.41   |  | Guarantee Agreement between Nationwide Financial Services, Inc. and Wachovia Bank, National Association, dated June 29, 2006 (previously filed as Exhibit 10.3 to Form
10-Q, Commission File Number 1-12785, filed August 3, 2006, and incorporated herein by reference)                      
|        | 
|10.42*  |  | Offer Letter for William Jackson, dated August 21, 2006 (previously filed as Exhibit 10.1 to Form 10-Q, Commission File Number 1-12785, filed November 3, 2006, and
incorporated herein by reference)                                                                                         
|        | 
|10.43*  |  | Offer Letter for James Lyski, dated August 30, 3006 (previously filed as Exhibit 10.2 to Form 10-Q, Commission File Number 1-12785, filed November 3, 2006, and
incorporated herein by reference)                                                                                             
|        | 
|10.44   |  | Share Purchase Agreement between Nationwide Financial Services, Inc. and Nationwide Corporation, dated November 27, 2006 (previously filed as Exhibit 10.55 to Form 10-K,
Commission File Number 1-12785, filed March 1, 2007, and incorporated herein by reference)                          
|        | 
|10.45   |  | Guaranty Agreement between Nationwide Financial Services, Inc. and The Charles Schwab Corporation, dated December 22, 2006 (previously filed as Exhibit 10.56 to Form 10-K,
Commission File Number 1-12785, filed March 1, 2007, and incorporated herein by reference)                        
|        | 
|10.46   |  | Purchase Agreement between Nationwide Financial Services, Inc. and Nationwide Corporation, dated February 2, 2007 (previously filed as Exhibit 10.1 to Form 8-K, Commission
File Number 1-12785, filed February 6, 2007, and incorporated herein by reference)                                
|        | 
|10.47   |  | Purchase Agreement between Nationwide Financial Services, Inc. and UBS AG, London Branch, dated April 5, 2007 (previously filed as Exhibit 10.2 to Form 10-Q, Commission
File Number 1-12785, filed May 4, 2007, and incorporated herein by reference)                                        
|        | 
|10.48   |  | Purchase Agreement between Nationwide Financial Services, Inc. and UBS AG, London Branch dated September 7, 2007 (previously filed as Exhibit 10.2 to Form 10-Q, Commission
File Number 1-12785, filed November 5, 2007, and incorporated herein by reference)                                
|        | 
|10.49*  |  | Executive Severance Agreement, dated January 1, 2008, between Nationwide Mutual Insurance Company and Larry
Hilsheimer                                                                                                                                                                        
|        | 
|10.50*  |  | Executive Severance Agreement, dated January 1, 2008, between Nationwide Mutual Insurance Company and Terri L.
Hill                                                                                                                                                                           
|        | 
|10.51*  |  | Executive Severance Agreement, dated January 1, 2008, between Nationwide Mutual Insurance Company and James
Lyski                                                                                                                                                                             
|        | 
|10.52*  |  | Executive Severance Agreement, dated January 1, 2008, between Nationwide Mutual Insurance Company and Michael C.
Keller                                                                                                                                                                       
|        | 
|10.53*  |  | Executive Severance Agreement, dated January 1, 2008, between Nationwide Mutual Insurance Company and Patricia R. Hatler                                                                                                                                                                      
|        | 
|10.54*  |  | Executive Severance Agreement, dated January 1, 2008, between Nationwide Financial Services, Inc. and Mark R. Thresher (previously
filed as Exhibit 99.1 to From 8-K, Commission File Number 1-12785, filed February 19, 2008, and incorporated herein by reference)                          



F-87



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##### Table of Contents

|        |  |                                                                                                                                                                                                                                                                  
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                  
|10.55*  |  | Executive Severance Agreement, dated January 1, 2008, between Nationwide Mutual Insurance Company and Stephen S. Rasmussen                                                                                                                                       
|        | 
|10.56*  |  | Executive Severance Agreement, dated January 1, 2008, between Nationwide Mutual Insurance Company and W.G Jurgensen (previously filed as Exhibit 99.2 to From 8-K,
Commission File Number 1-12785, filed February 19, 2008, and incorporated herein by reference)
|        | 
|10.57*  |  | Nationwide Financial Services, Inc. 2008 Deferred Compensation Plan for Non-Employee Directors, effective as of February 19, 2008                                                                                                                                
|        | 
|10.58*  |  | First Amendment to the Nationwide Individual Deferred Compensation Plan, as amended and restated, effective as of January 1, 2005                                                                                                                                
|        | 
|10.59*  |  | Second Amendment to the Nationwide Individual Deferred Compensation Plan, as amended and restated, effective as of January 1, 2005                                                                                                                               
|        | 
|10.60*  |  | Third Amendment to the Nationwide Individual Deferred Compensation Plan, as amended and restated (now known as the Nationwide Officer Deferred Compensation Plan),
effective as of January 1, 2005                                                               
|        | 
|12      |  | Computation of Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                
|        | 
|18.1    |  | Letter regarding change in accounting principle from KPMG LLP related to annual goodwill impairment testing (previously filed as Exhibit 18 to Form 10-Q, Commission File
Number 1-12785, filed November 12, 2003, and incorporated herein by reference)         
|        | 
|18.2    |  | Letter regarding change in accounting principle from KPMG LLP related to accrued legal expenses (previously filed as Exhibit 18.1 to Form 10-Q, Commission File Number
1-12785, filed August 2, 2007, and incorporated herein by reference)                      
|        | 
|21      |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                   
|        | 
|23      |  | Consent of KPMG LLP, Independent Registered Public Accounting Firm                                                                                                                                                                                               
|        | 
|31.1    |  | Certification of W.G. Jurgensen pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                         
|        | 
|31.2    |  | Certification of Timothy G. Frommeyer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                   



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##### Table of Contents

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|32.1    |  | Certification of W.G. Jurgensen pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit is intended to be
furnished in accordance with Regulation S-K, Item 601(b)(32)(ii) and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any document filed under the Securities
Act of 1933, except as shall be expressly set forth by specific reference to such filing)      
|        | 
|32.2    |  | Certification of Timothy G. Frommeyer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit is intended to
be furnished in accordance with Regulation S-K, Item 601(b)(32)(ii) and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any document filed under the Securities
Act of 1933, except as shall be expressly set forth by specific reference to such filing)



|* | Management Compensatory Plan
|- | ----------------------------



All other exhibits referenced by Item 601 of Regulation S-K are not required under the related instructions or are inapplicable and
therefore have been omitted.



F-89